Chapter 7

CHAPTER 7
Impairment of assets
C HA PTE R AIM
This chapter discusses the application of AASB 136/IAS 36 Impairment of Assets. The objectives of the standard
are to prescribe accounting procedures to ensure that assets are carried at amounts not greater than their
recoverable amounts, that impairment losses are recognised if an asset’s carrying amount is greater than its
recoverable amount, that impairment losses are reversed when appropriate, and that appropriate disclosures
are made.
LEA RNIN G OBJE CTIVE S
After studying this chapter, you should be able to:

7.1 explain the nature and purpose of an impairment test
7.2 explain when an impairment test should be undertaken
7.3 outline the components of the impairment test
7.4 describe how to account for an impairment loss for a single asset
7.5 describe how to account for an impairment loss for a cash‐generating unit
7.6 explain when an impairment loss can be reversed and how to account for it
7.7 identify the disclosures required in relation to impairment of assets.
C ONC EP TS FOR RE VIE W
Before studying this chapter, you should understand and, if necessary, revise:
• the conceptual framework
• the concepts of depreciation and the revaluation model adopted in AASB 116/IAS 16 Property, Plant and
Equipment
• the nature of acquired goodwill and its accounting treatment under AASB 3/IFRS 3 Business
Combinations.
7.1 Introduction and scope
LEARNING OBJECTIVE 7.1 Explain the nature and purpose of an impairment test.
Every entity hopes that it will have a profitable future. However, an entity’s profitability may be affected
by any number of external factors besides the ability of management.
For an entity in any year there may be declines in expected benefits from single assets as well as groups
of assets. A major question when preparing the statement of financial position is whether the carrying
amounts of the assets on that statement represent amounts that are recoverable by the entity.
The accounting profession has introduced an impairment test that entities apply to test the recovera-
bility of their assets, which is aimed at providing reassurance to users of financial statements about the
relevance and faithful representation of the accounting numbers disclosed.
Chapters 5 and 6 discuss the measurement and recognition criteria for property, plant and equipment
and intangible assets respectively. These assets can be measured at either cost or a revalued amount and
this is subsequently allocated over the useful life as depreciation or amortisation. The exception is
where the asset (such as land or certain intangible assets) is assessed to have an indefinite useful life, in
which case no allocation is made.
The degree of judgement involved in the depreciation/amortisation process — estimates of useful life,
residual values and the expected pattern of benefits — leads to the question at the end of the reporting
period: does the carrying amount of the asset reported in the statement of financial position overstate
the value of the asset? In other words, can an entity expect to recover, in future periods, the carrying
amounts of the assets reported? This recovery could come from continued use or sale of the assets.
Besides the judgements made in measuring carrying amounts, assets may have lost value for other
reasons, such as a global economic downturn or a natural disaster. In recent years, mining companies
have announced significant impairment losses due to declines in world commodity prices. In other cases,
impairment write-downs may arise due to management identifying the need to restructure operations.
The article in figure 7.1 discusses how Woolworths’ decision to exit from the home improvement market
had an adverse effect on its financial results.
FIGURE 7.1 Effects on expected profits
Woolworths reports almost $1 billion loss in half-year results

Woolworths has posted an after-tax loss of $972.7 million in its half-year results, after the retailer’s failed
venture into the home improvement market dragged on its bottom line.
The financial result represents the grocery giant’s first loss since it was listed on the Australian stock
exchange 23 years ago.
In the six months to January 3, Woolworths said first-half results slumped 176 per cent from the
$1.28 billion profit the supermarket giant posted in the previous corresponding period.
Woolworths said impairment charges and costs to exit its Masters Home Improvement arm would
total $1.89 billion.
Losses at Masters increased by 22.9 per cent to $137.9 million, on the back of costly store openings
and mixed gross margins.
‘We are rebuilding the Woolworths business,’ said chairman Gordon Cairns in a statement released to
the Australian Securities Exchange.
‘While we have made progress, it will be a three to five year journey and there is much to do.’
‘The decision to exit home improvement will allow Woolworths to focus its energy and resources on
strengthening and executing its plans in its core businesses.’
Last month, Woolworths announced it would exit the loss-making Masters business, by selling or
winding up the stores, after buying out its US partner, Lowe’s.
‘It appears it’s been poorly executed,’ said Roger Montgomery, chief investment officer at Montgomery
Investment Management.
222 Financial reporting in Australia

‘It didn’t appeal to the trade market, it was designed to appeal to a different market, that
market didn’t make the purchasing decisions [of] the sorts of products hardware stores are expected to sell.’
‘So arguably, there was a mismatch between the design of the store and the most profitable audience.’
Source: Hyam and Ong (2016).
Paragraph 6 of AASB 136/IAS 36 Impairment of Assets defines an impairment loss as:

the amount by which the carrying amount of an asset or a cash‐generating unit exceeds its recoverable amount.
So, if an entity expects to recover less than the carrying amount of an asset, the entity has suffered an
impairment loss in relation to that asset.
This chapter examines the impairment test for assets. Under AASB 136/IAS 36, an entity is required
to conduct impairment tests for its assets to see whether it has incurred any impairment loss. The pur-
pose of the impairment test is to ensure that assets are not carried at amounts that exceed their recover-
able amounts or, more simply, that assets are not overstated.
Some key questions answered in this chapter are as follows.
•• How does the test work?
•• What is recoverable amount?
•• Is the test the same for all assets?
•• Should the test apply to individual assets or to groups of assets? If applied to groups, which groups?
•• Is the accounting treatment the same for assets measured at cost and for those measured at revalued amount?
•• When should the test be carried out? Should it be done annually; every 3 years; or over some other period?
•• Can the results of the impairment test be reversed; that is, if an asset is written down because it is
impaired, can later events lead to the reversal of that write‐down?
The impairment test is not applied to all assets. Assets to which AASB 136/IAS 36 is not applied are:
•• inventories
•• assets arising from construction contracts
•• deferred tax assets (see chapter 12)
•• assets arising from employee benefits
•• financial assets that are within the scope of AASB 9/IFRS 9 Financial Instruments
•• investment property that is measured at fair value
•• biological assets related to agricultural activity that are measured at fair value less costs of disposal
•• deferred acquisition costs and intangible assets, arising from an insurer’s contractual rights under
insurance contracts
•• non‐current assets (or disposal groups) classified as held for sale.
The accounting standards dealing with the above assets require the assets to be measured at fair value
or fair value less costs of disposal. Where assets are recorded at fair value, there is no need for an
impairment test as the fair values reflect recoverability of benefits.
Note particularly the accounting for inventories. Under paragraph 9 of AASB 102/IAS 2 Inventories,
inventories shall be measured at the lower of cost and net realisable value. As net realisable value is
defined in terms of estimated price, the measurement of inventories has a ‘built‐in’ impairment test
requiring inventories to be written down when the cost is effectively greater than the recoverable amount.
LEARNING CHECK
■■ The carrying amounts of assets in an entity’s statement of financial position are the result of
judgements and estimations.
■■ The purpose of the impairment test is to ensure that assets are not overstated in the statement of
financial position.
■■ Not all assets are written down as a result of an impairment test under AASB 136/IAS 36, but the standard
that governs the accounting for those assets may be considered to have a ‘built‐in’ impairment test.
CHAPTER 7 Impairment of assets 223

7.2 When to undertake an impairment test
LEARNING OBJECTIVE 7.2 Explain when an impairment test should be undertaken.
Paragraph 9 of AASB 136/IAS 36 states:
An entity shall assess at the end of each reporting period whether there is any indication that an asset may be
impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
An impairment test is not necessarily undertaken at the end of each reporting period or at the end of
any set period of time. The impairment test is undertaken when there is an indication that an asset may
be impaired. An entity, therefore, has to determine — after analysing certain sources of information —
whether there is sufficient evidence to suspect that an asset may be impaired.
If there is insufficient evidence, then an entity can assume no impairment has occurred, and no impair-
ment test is conducted.
For most assets, the need for an impairment test can be assessed by analysing sources of evidence.
However, paragraph 10 of AASB 136/IAS 36 specifies some assets for which an impairment test must be
undertaken every year. These assets are:
•• intangible assets with indefinite useful lives
•• intangible assets not yet available for use (e.g. capitalised development outlays)
•• goodwill acquired in a business combination.
The reason for singling these assets out for annual impairment tests is that the carrying amounts
of these assets are considered to be more uncertain than those of other assets. Other assets tend to be
reduced each year as a result of annual depreciation/amortisation charges. The above assets, however,
are not subject to depreciation/amortisation reductions.
7.2.1 Evidence of impairment

The purpose of the impairment test is to determine whether the carrying amount of an asset exceeds its
recoverable amount. The evidence of impairment relates to variables that may support the belief that
the book value of the asset under investigation overstates the future cash flows expected to be generated
from its use or sale. Management should take into account the nature and use of a specific asset and
determine the factors that may indicate impairment.
Indicators of impairment can be described in two groups: external sources of information (looking
at what is occurring outside the entity) and internal sources of information (looking at events occurring
within the entity itself).
External sources of information

Paragraph 12 of AASB 136/IAS 36 identifies four possible sources of information relating to the external
environment in which the entity operates, as follows.
1. ‘There are observable indications that the asset’s value has declined during the period significantly
more than would be expected as a result of the passage of time or normal use.’ This may occur
for many reasons relating to changes in expectations concerning the operation of the entity. For
example, there may have been a significant reduction in the entity’s sales when new products or
technologies that the entity planned to introduce within a certain timeframe were not introduced
within that timeframe. Further, there may have been movements in key personnel that affected the
productivity of the entity itself and brought increased pressure from competitors who employed
those people.
2. ‘Significant changes with an adverse effect on the entity have taken place during the period, or will
take place in the near future, in the technological, market, economic or legal environment in which
the entity operates or in the market to which an asset is dedicated.’ A significant drop in commodity
prices, for example, would have an adverse impact on the estimation of future cash flows when
determining the value in use of a mining company’s property, plant and equipment.

3. ‘Market interest rates or other market rates of return on investments have increased during the period,
and those increases are likely to affect the discount rate used in calculating an asset’s value in use
and decrease the asset’s recoverable amount materially.’ Such increases have the potential to increase
the discount rate used in assessing an entity’s present value of future cash flows.
4. ‘The carrying amount of the net assets of the entity is more than its market capitalisation.’ This would
indicate that, in the market’s view at least, the assets of the entity are overstated.
Internal sources of information
Paragraph 12 of AASB 136/IAS 36 goes on to identify three possible sources of information based on
events occurring within the entity itself, as follows.
1. ‘Evidence is available of obsolescence or physical damage of an asset.’ Examples include an item
of machinery that has been superseded by technology or major flood damage to an uninsured
building.
2. ‘Significant changes with an adverse effect on the entity have taken place during the period, or are expected
to take place in the near future, in the extent to which, or manner in which, an asset is used or expected to
be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation
to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing
the useful life of an asset as finite rather than indefinite.’ For example, when Ford Australia announced it
would close its Australian plants, it would clearly result in an adverse effect on any local car parts supplier
for whom Ford was a major customer. A car parts supplier would have needed to reassess its estimation of
future cash flows from its own assets.
3. ‘Evidence is available from internal reporting that indicates that the economic performance of an
asset is, or will be, worse than expected.’ Evidence of this consists of:
(a) actual cash flows for maintenance or operation of the asset may be significantly higher than
expected
(b) actual cash inflows or profits may be lower than expected
(c) expected cash flows for maintenance or operations may have increased, or expected profits may be
lower.
In analysing the information from the above sources, paragraph 15 of AASB 136/IAS 36 requires
that materiality be taken into account. If, in previous analyses, the carrying amount of an asset was
significantly lower than the asset’s recoverable amount, minor movements in the factors listed above
may cause the recoverable amount to be closer to the carrying amount but not large enough to expect the
carrying amount to be greater than the recoverable amount.
Woolworths’ 2016 annual report provided the disclosure note shown in figure 7.2.
FIGURE 7.2 Impairment disclosure note extract, Woolworths
13 Impairment of non-financial assets

Significant accounting policies
Impairment of non-financial assets
The carrying amounts of the Group’s property, plant and equipment (refer to Note 11), goodwill and
intangible assets (refer to Note 12) are reviewed for impairment as follows:
Property, plant and equipment and finite life When there is an indication that the asset may be impaired
intangibles (assessed at least each reporting date) or when there is
an indication that a previously recognised impairment may
have changed
Goodwill and indefinite life intangibles At least annually and when there is an indication that the
asset may be impaired
Source: Woolworths Limited (2016, p. 41).

Impairment tests are conducted both on individual assets and groups of assets, the latter being referred
to as cash‐generating units (CGUs).
LEARNING CHECK
■■ With the exception of the mandatory tests for goodwill (addressed later in this chapter) and
intangible assets with an indefinite useful life, an impairment test is conducted only when there is
evidence that assets have been impaired.
■■ Evidence of impairment may be obtained from external and/or internal sources.
■■ External sources relate to factors outside the entity such as changes in market prices, whereas
internal sources relate to factors within the entity such as idle time of machinery held by the entity.
7.3 The impairment test

LEARNING OBJECTIVE 7.3 Outline the components of the impairment test.
The impairment test is shown diagrammatically in figure 7.3 as a two‐step process.
FIGURE 7.3 The impairment test
Step 1: Determine Recoverable amount
equal to the higher of
Fair value less

and Value in use
costs of disposal
Step 2: Compare Recoverable amount and Carrying amount
If recoverable amount < carrying amount, an impairment loss has occurred.

If recoverable amount > carrying amount, no further action is required.
The first step is to determine the recoverable amount of an asset, which is done by considering the
following three components defined in paragraph 6 of AASB 136/IAS 36.
•• Fair value — ‘the price that would be received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement date.’ See chapter 3 for more
information on the measurement of fair value.

•• Costs of disposal — ‘incremental costs directly attributable to the disposal of an asset or cash‐
generating unit, excluding finance costs and income tax expense’. Examples of such costs are legal
costs, stamp duty and similar transaction taxes, costs of removing the asset and direct incremental
costs to bring the asset into condition for its sale.
•• Value in use — ‘the present value of the future cash flows expected to be derived from an asset or
cash‐generating unit’. See later in this section for more details on its measurement.
Considering these three components, the recoverable amount of an asset or a CGU is the higher of:
•• its fair value less costs of disposal
•• its value in use.
Thus, recoverable amount is the benefits or cash flows expected from the asset. Note that, for any
asset, there are two possible sources of benefits: (i) benefits from holding on to the asset and using it,
and (ii) benefits from selling the asset. For example, if a person owns a car, they can either use the
car or sell the car. If they decide to use the car, it is because they have reasoned that the benefits from
use are greater than the benefits from selling the car. This rationale can be applied to all assets held
by an entity.
For non‐current assets, the benefits from using the assets are presumed to be greater than the ben
efits from selling them. This is why an entity will hold property, plant and equipment, intangible assets
and financial assets. These assets are held and used to produce cash flows rather than cash flows being
obtained from selling these assets.
The second step is then to compare the recoverable amount with the carrying amount of the asset as
recorded by the entity. An impairment loss is the amount by which the carrying amount of an asset or
CGU exceeds its recoverable amount.
•• If the recoverable amount is greater than the carrying amount, there is no impairment loss.
•• If the recoverable amount is less than the carrying amount, an impairment loss has occurred.
It is not always necessary to calculate both fair value less costs of disposal and value in use for an
asset when testing for impairment. If one of the amounts is greater than carrying amount, the asset is
not impaired. In general, it is often easier to calculate fair value less costs of disposal rather than value
in use.
7.3.1 Fair value less costs of disposal

Fair value is measured in accordance with AASB 13/IFRS 13 Fair Value Measurement and discussed in
detail in chapter 3. Fair value is defined as an exit price and can be measured applying a number of valu
ation techniques using various observable or unobservable inputs.
7.3.2 Value in use

Value in use is the present value of future cash flows relating to the asset being measured. Paragraph 30
of AASB 136/IAS 36 notes that:
The following elements shall be reflected in the calculation of an asset’s value in use:
(a) an estimate of the future cash flows the entity expects to derive from the asset;
(b) expectations about possible variations in the amount or timing of those future cash flows;
(c) the time value of money, represented by the current market risk‐free rate of interest;
(d) the price for bearing the uncertainty inherent in the asset; and
(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the
entity expects to derive from the asset.
The objective is to measure the present value of the cash flows relating to the asset; in other words,
to determine the cash flows and apply a discount rate. Some of the elements noted above — particularly
(b), (d) and (e) — may affect either the measurement of the cash flows or the discount rate. Figure 7.4
shows a calculation of value in use.

FIGURE 7.4 Calculation of value in use
Long‐term Future cash Present value factor Discounted

Year growth rates flows at 15% discount rate future cash flows
2009 $230* 0.869 57 $ 200
2010 253* 0.756 14 191
2011 273* 0.657 52 180
2012 290* 0.571 75 166
2013 304* 0.497 18 151
2014 3% 313** 0.432 33 135
2015 −2% 307** 0.375 94 115
2016 −6% 289** 0.326 90 94
2017 −15% 245** 0.284 26 70
2018 −25% 184** 0.247 19 45
2019 −67% 61** 0.214 94 13
Value in use $1 360
* Based on management’s best estimate of net cash flow projections.

**Based on an extrapolation from preceding year cash flow using declining growth rates.
Source: Based on Example 2 in the illustrative examples accompanying AASB 136/IAS 36.
As can be seen from figure 7.4, the calculation of value in use requires the estimation of future cash
flows and a discount rate applied to these future cash flows.
LEARNING CHECK
■■ The impairment test for a single asset requires a comparison between the carrying amount of the
asset and its recoverable amount, the latter being the higher of fair value less costs of disposal,
and value in use.
■■ For any non‐current asset, future cash flows are generated from either continued use or sale, and
recoverable amount is the greater of these two estimates.
■■ Value in use is calculated by estimating the future cash flows relating to the asset being tested,
then discounting these cash flows to a present value. Such a calculation requires assumptions and
estimates to be made about future events.
7.4 Impairment loss: individual assets

LEARNING OBJECTIVE 7.4 Describe how to account for an impairment loss for a single asset.
If the recoverable amount of an asset is less than its carrying amount, an impairment loss occurs. The
asset must then be written down to the recoverable amount. The accounting involved depends on whether
the asset is measured under the cost model or the revaluation model. According to paragraph 59 of
AASB 136/IAS 36:
If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the
asset shall be reduced to its recoverable amount. That reduction is an impairment loss.
Under the cost model, an impairment loss is recognised immediately in profit or loss by debiting
an expense account and crediting the contra‐asset account Accumulated depreciation and impairment
losses. This is demonstrated in illustrative example 7.1.

ILLUSTRATIVE EX AMPLE 7.1
Recognition of an impairment loss under the cost model

A motor vehicle with a carrying amount of $100 after accumulated depreciation of $60 has a recover-
able amount of $90.
Required
What is the appropriate journal entry to recognise the impairment loss of $10? How would the asset be
carried and disclosed in the financial statements?
Solution
The journal entry is as follows.
Impairment loss Dr 10
Accumulated depreciation and impairment losses Cr 10
(Recognition of impairment loss)
The asset would then be carried and disclosed in the financial statements as follows.
Motor vehicle 160

Less: accumulated depreciation and impairment losses 70
90
According to paragraph 60 of AASB 136/IAS 36:

An impairment loss shall be recognised immediately in profit or loss, unless the asset is carried at revalued
amount in accordance with another Standard (for example, in accordance with the revaluation model in
AASB 116 [IAS 16]). Any impairment loss of a revalued asset shall be treated as a revaluation decrease in
accordance with that other Standard.
Under the revaluation model, where the asset is measured at fair value, an impairment loss is treated as a
downward revaluation and accounted for as in AASB 116/IAS 16 Property, Plant and Equipment. Hence,
the downward revaluation is treated as an expense unless there has been a previous revaluation increase for
that particular asset, in which case the downward revaluation reduces the existing revaluation surplus and
is recognised in other comprehensive income. This is demonstrated in illustrative examples 7.2 and 7.3.
Recognition of an impairment loss under the revaluation model

Assume the motor vehicle from illustrative example 7.1 is carried under the revaluation model, has a
carrying amount of $100 after accumulated depreciation of $60, and the recoverable amount of the
asset is determined to be $90.
Required
What is the accounting entry, assuming the net method?
Solution
Accumulated depreciation Dr 60
Motor vehicle Cr 60
(Writing back the accumulated depreciation)
Loss on revaluation Dr 10
Motor vehicle Cr 10
(Recognition of loss on revaluation)

Recognition of an impairment loss subsequent to a prior

revaluation increase
As before, a motor vehicle is carried under the revaluation model, has a carrying amount of $100 after
accumulated depreciation of $60, and the recoverable amount of the asset is determined to be $90.
Assume the vehicle had been subject to a revaluation increase of $20 in a prior period.
Required
How would the impairment loss be recognised?
Solution
Accumulated depreciation Dr 60
Motor vehicle Cr 60
(Writing back the accumulated depreciation)
Revaluation surplus (OCI) Dr 10
Motor vehicle Cr 10
(Recognition of loss on revaluation)
LEARNING CHECK
■■ Where an impairment loss is identified, the asset is written down immediately.

■■ The accounting treatment depends on whether the cost or revaluation model is being used
for the asset.
■■ Under the cost model an impairment expense is recognised in profit or loss.
■■ Under the revaluation model the impairment is treated as a revaluation decrease in accordance with
AASB 116/IAS 16.
7.5 Impairment loss: cash‐generating units

LEARNING OBJECTIVE 7.5 Describe how to account for an impairment loss for a cash‐generating unit.
In order to calculate an impairment loss it is necessary to determine the value in use. This requires the
calculation of the cash flows that are expected to be generated from using the asset. However, many
assets do not individually generate cash flows. The cash flows arise as a result of a combination of sev-
eral assets working together. For example, the motor vehicle used by a sales manager does not by itself
generate cash flows. The cash flows are generated by the sales of inventories produced by combining
many assets, including machinery, raw materials, buildings and vehicles.
If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the indi-
vidual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall
determine the recoverable amount of the cash‐generating unit to which the asset belongs (the asset’s cash‐
generating unit).
Paragraph 6 of AASB 136/IAS 36 defines a cash‐generating unit (CGU) as:

the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash
inflows from other assets or groups of assets.

7.5.1 Identifying a cash‐generating unit
Identification of a CGU requires judgement. The key is to determine the smallest identifiable group of
assets that creates independent cash flows from continuing use. Paragraphs 67 to 73 of AASB 136/IAS 36
provide some guidelines to assist in this judgement, as follows.
•• Consider how management monitors the entity’s operations (such as by product lines, businesses,
individual locations, districts or regional areas).
•• Consider how management makes decisions about continuing, or disposing of, the entity’s assets and
operations.
•• If an active market exists for the output of a group of assets, this group constitutes a CGU.
•• Even if some of the output of a group is used internally, if the output could be sold externally, then
these prices can be used to measure the value in use of the group of assets.
•• CGUs should be identified consistently from period to period for the same group of assets.
To assist in understanding the nature of a CGU, consider your local McDonald’s restaurant. This res-
taurant has a number of assets including the building, shop fittings and furniture as well as the equip-
ment that is used to produce the food both for take‐away and in‐house dining.
None of these assets by itself generates independent cash flows. The cash flows come from the sale
of products such as hamburgers. The cash flows are produced by the combination of assets working
together leading to the sale of the products.
The key question is: how many CGUs are there in your local McDonald’s restaurant — in particular,
where the McDonald’s restaurant is also a McCafé? A McCafé not only sells the usual range of ham-
burgers and fries, but a customer can choose to sit in a more comfortable area and consume a cappuccino
and a muffin or pastry.
To determine how many CGUs there are in a McCafé restaurant, it is necessary to determine the
number of groups of assets that independently generate cash flows. It can be argued that there are
two CGUs in a McCafé restaurant. The first CGU relates to the assets that combine to sell hamburgers
and fries. The second CGU relates to the assets that combine to sell the coffee and cakes. Looking at the
guidelines raised at the beginning of this section:
•• How does management monitor the entity’s operations? The profitability of the McCafé section would
be determined separately from the profitability of the hamburgers and fries section. These two product
lines are different.
•• How would management make decisions about continuing or disposing of the entity’s assets? Con-
sider the situation where a Coffee Club was built across the road from the McDonald’s, and that local
consumers preferred the Coffee Club coffee to the McCafé coffee. This would lead to a decline in the
profitability of the McCafé section of the McDonald’s restaurant. The management of McDonald’s
could continue to operate the hamburger and fries section of McDonald’s even if they closed down the
McCafé section. The two operations are independent.
Application of the guidelines would support the existence of two CGUs in the McDonald’s restaurant.
Note that there are assets that are common to both CGUs — in particular, the building which houses
both CGUs. Such common or corporate assets are dealt with later in this chapter in section 7.5.4.
The identification of a CGU within an entity is arbitrary. It requires judgement on the part of man-
agement, and comparability between entities is generally not available. It may be possible to view
the segments of an entity as determined under application of AASB 8/IFRS 8 Operating Segments
(see chapter 20) to assist in identifying CGUs within an entity.
7.5.2 Goodwill and CGUs

For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisi-
tion date, be allocated to each of the acquirer’s cash‐generating units, or groups of cash‐generating units, that
is expected to benefit from the synergies of the combination . . .

Goodwill is recognised only when it is acquired in a business combination. When a business combi-
nation occurs, the goodwill acquired is allocated to one or more CGUs based upon the expected benefits
from the synergies of the business combination.
When deciding how to allocate the goodwill, consideration should be given to how management mon-
itors or manages the goodwill. The goodwill should be allocated to the lowest level within the entity at
which management monitors the goodwill. When the business combination occurred, the acquirer would
have analysed the earning capacity of the entity it proposed to acquire, and would have equated aspects
of goodwill to various CGUs. It is possible that the allocation of goodwill would be made to each of
the segments identified by management under AASB 8/IFRS 8 Operating Segments. The units to which
goodwill is allocated should not be larger than an operating segment.
In its 2016 annual report, Woolworths Limited identified six reportable segments. Figure 7.5 shows
Woolworths’ accounting policies relating to goodwill impairment and how Woolworths allocated good-
will across its segments. Note in figure 7.2 how goodwill and other intangible assets with indefinite lives
are reviewed annually for impairment.
FIGURE 7.5 Accounting policies relating to impairment and allocation of goodwill to segments, Woolworths Limited
12 Intangible assets
The components of goodwill and indefinite life intangible assets by groups of cash-generating units are
as follows:
Goodwill
2016 2015
$M $M
Australian Food and Petrol 394.5 393.6
New Zealand Supermarkets 2 089.7 1 953.9
Endeavour Drinks Group 473.8 473.3
General Merchandise1 — 246.4
Hotels 679.0 670.8
Home Improvement2 — 87.9
Unallocated 0.3 0.3
3 637.3 3 826.2
13 Impairment of non-financial assets

Calculation of recoverable amount
In assessing impairment, the recoverable amount of the asset is estimated in order to determine the
extent of the impairment loss (if any).
The recoverable amount of an asset is the greater of its VIU and its fair value less costs to dispose
(FVLCTD). For an asset that does not generate largely independent cash inflows, recoverable amount is
assessed at the cash generating unit (CGU) level, which is the smallest group of assets generating cash
inflows independent of other CGUs that benefit from the use of the respective asset. Goodwill is allo-
cated to those CGUs or groups of CGUs that are expected to benefit from the business combination in
which the goodwill arose, identified according to operating segments and grouped at the lowest levels
for which goodwill is monitored for internal management purposes.
An impairment loss is recognised whenever the carrying amount of an asset or its CGU exceeds its
recoverable amount. Impairment losses are recognised in the Consolidated Statement of Profit or Loss.
Impairment losses recognised in respect of a CGU will be allocated first to reduce the carrying amount
of any goodwill allocated to the CGU and then to reduce the carrying amount of other assets in the CGU
on a pro-rata basis to their carrying amounts.
1The
goodwill and brand names of EziBuy, reported within the 2015 General Merchandise cash generating unit group, were fully
impaired in 2016 (refer to Note 13).
2 All indefinite life assets in Home Improvement were fully impaired in 2016.
Source: Woolworths Limited (2016, pp. 74–5).

7.5.3 Impairment loss for a CGU
Having identified the CGU, at the end of a reporting period, management assess the sources of infor-
mation determining whether there is an indication of impairment. If it is probable that the assets of the
CGU are impaired, management then:
•• calculate the recoverable amount of the CGU
•• compare it with the total carrying amount of the assets of the CGU
•• determine whether an impairment loss exists.
In determining the recoverable amounts for the CGUs, an entity makes many assumptions. Entities are
required to disclose those assumptions so that users of financial reports can make assessments about the
relative risks involved in their investments. Figure 7.6 shows the assumptions made by Woolworths in
the calculation of both value in use and fair value less costs of disposal.
FIGURE 7.6 Critical accounting estimates in determining recoverable amount, Woolworths Limited
Critical accounting estimates

Key assumptions used in determining the recoverable amount of assets include expected future cash
flows, long‐term growth rates (terminal value assumptions) and discount rates.
In assessing VIU, estimated future cash flows are based on the Group’s most recent Board approved
business plan covering a period not exceeding five years. Cash flows beyond the approved business
plan period are extrapolated using estimated long‐term growth rates.
In assessing FVLCTD, estimated future cash flows are based on the Group’s most recent Board
approved business plan. Cash flows beyond the approved business plan period are based on estimated
long‐term growth rates.
For both VIU and FVLCTD models, long‐term growth rates are based on past experience, expec-
tations of external market operating conditions, and other assumptions which take account of the
specific features of each business unit. Long-term growth rates do not exceed industry growth rates for
the business in which the CGU operates. In this regard, the cash flow projections are based on assump-
tions that would be considered typical for a market participant.
Estimated future cash flows in VIU models are discounted to present value using a pre‐tax discount
rate that reflects current market assessments of the time value of money and the risks specific to the
asset. Pre‑tax discount rates used vary depending on the nature of the business and the country of
operation. Estimated future cash flows in FVLCTD models are discounted to present value using a risk
adjusted discount rate commensurate with a typical market participant’s assessment of the risk associ-
ated with the projected cash flows.
The ranges of rates used in determining recoverable amounts are set out below:
2016 2015
% %
Long-term growth rate 0.5–2.5 2.5
Pre-tax discount rate 13–16.5 13–14
The Group believes that any reasonably possible change in the key assumptions applied would not
cause the carrying value of assets to exceed their recoverable amount and result in a material impair-
ment based on current economic conditions and CGU performance.
Source: Woolworths Limited (2016, p. 76).

Once the recoverable amount of a CGU is determined, it is compared with the sum of the carrying
amounts of the assets in the CGU. If an impairment loss is identified, the loss must be written off against
the assets of the CGU. The allocation process has two steps:
1. reduce the carrying amount of any goodwill allocated to the CGU
2. allocate any balance of impairment loss to the other assets of the CGU pro rata on the basis of the
carrying amount of each asset in the CGU.
Specifically, paragraph 104 of AASB 136/IAS 36 states:
The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units)
in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash‐generating unit (group of units); and
(b) then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each
asset in the unit (group of units).
These reductions in carrying amounts shall be treated as impairment losses on individual assets and recog-
nised in accordance with paragraph 60.
Step 1: Reduce the carrying amount of any goodwill allocated to the CGU
Because goodwill has been calculated as a residual rather than independently determined as in the case of
the identifiable assets, both its carrying amount and its existence are considered less reliable than that of the
identifiable assets. Hence, it is written off before any write‐down of the identifiable assets.
Write‐down of goodwill as a result of an impairment loss

Gift Ltd has two CGUs, Blue and Box. A comparison of the assets of these CGUs and their recoverable
amounts is shown below.
CGU — Blue CGU — Box

Property, plant and equipment $1 000 000 $ 900 000
Goodwill 300 000 200 000
Accumulated impairment — goodwill (100 000) (50 000)
Carrying amount 1 200 000 1 050 000
Recoverable amount 1 100 000 880 000
Impairment loss 100 000 170 000
Required
Prepare the journal entries to write down the goodwill.
Solution
In accounting for the impairment losses, the first step requires the write‐down of goodwill. With the Blue
CGU, only some of the goodwill is written off, while with the Box CGU all the goodwill is written off.
With the Box CGU further journal entries (see step 2 below) are needed to recognise the balance of the
impairment loss.
The journal entries are:
Impairment loss Dr 100 000

Accumulated impairment losses — goodwill Cr 100 000
(Recognition of impairment loss for Blue CGU)
Accumulated impairment losses — goodwill Dr 50 000
Goodwill Cr 200 000
(Write‐off of goodwill for Box CGU)

Step 2: Allocate any balance of impairment loss to the other assets
The assets of the CGU are then listed and the impairment loss allocated on a proportional basis to each
asset. The reduction in the carrying amount of each asset is accounted for in the same way as for single
assets in section 7.4. The losses are recognised immediately in profit or loss.
Impairment of a CGU
The Box CGU in illustrative example 7.4 was assessed for impairment and it was determined that the
unit had incurred an impairment loss of $170 000 with the first $150 000 written off against goodwill. The
carrying amounts of the CGU’s other assets and the allocation of the remaining $20 000 impairment loss
on a proportional basis are as shown below.
Allocation of
Carrying impairment Net carrying
amount Proportion loss amount
Buildings $ 360 000 360/900 $ 8 000 $ 352 000
Equipment 225 000 225/900 5 000 220 000
Land 180 000 180/900 4 000 176 000
Fittings 135 000 135/900 3 000 132 000
$ 900 000 $20 000 $ 880 000
Required
Prepare the journal entry to reflect the recognition of the impairment loss.
Solution

Accumulated depreciation and impairment losses — buildings Cr 8 000
Accumulated depreciation and impairment losses — equipment Cr 5 000
Accumulated impairment losses — land Cr 4 000
Accumulated depreciation and impairment losses — fittings Cr 3 000
However, there are restrictions on an entity’s ability to write down assets as a result of the allocation
of the impairment loss across the carrying amounts of the CGU’s assets. According to paragraph 105 of
AASB 136/IAS 36:
In allocating an impairment loss in accordance with paragraph 104, an entity shall not reduce the carrying
amount of an asset below the highest of:
(a) its fair value less costs of disposal (if measureable);
(b) its value in use (if determinable); and
(c) zero.
The amount of impairment loss that would otherwise have been allocated to the asset shall be allocated pro
rata to the other assets of the unit (group of units).
In general, the value in use for individual assets would not be known — the CGU is the smallest
group of assets independently generating cash flows. Hence, the test is generally in relation to the net
fair value.
If there is an amount of impairment loss allocated to an asset, but a part of it would reduce the asset
below, say, its fair value less costs of disposal, then that part is allocated across the other assets in the
CGU on a pro rata basis.

Impairment of a CGU
The Box CGU in illustrative example 7.4 was assessed for impairment and it was determined that the
unit had incurred an impairment loss of $170 000 with the first $150 000 written off against goodwill. The
carrying amounts of the CGU’s other assets and the allocation of the remaining $20 000 impairment loss
on a proportional basis are as follows.
Allocation of
Buildings $ 360 000 360/900 $ 8 000 $ 352 000
Equipment 225 000 225/900 5 000 220 000
Land 180 000 180/900 4 000 176 000
Fittings 135 000 135/900 3 000 132 000
$ 900 000 $20 000 $ 880 000
Required
Assume the fair value less costs of disposal of the buildings was $355 000. Applying paragraph 105, this
is the maximum to which this asset could be reduced. Hence, the balance of the allocated impairment
loss to buildings of $3000 (i.e. $8000 – [$360 000 – $355 000]) has to be allocated across the other
assets. Allocate the impairment loss on a proportional basis to the other assets. Prepare the journal
entry to reflect the recognition of the impairment loss.
Solution
Allocation of
Buildings $ 355 000
Equipment $ 220 000 220/528 $ 1 250 218 750
Land 176 000 176/528 1 000 175 000
Fittings 132 000 132/528 750 131 250
$ 528 000 $ 3 000 $ 880 000
The journal entry to reflect the recognition of the impairment loss is:

Accumulated depreciation and impairment losses — buildings Cr 5 000
Accumulated depreciation and impairment losses — equipment
[$5000 + $1250] Cr 6 250
Accumulated impairment losses — land
[$4000 + $1000] Cr 5 000
Accumulated depreciation and impairment losses — fittings
[$3000 + $750] Cr 3 750
7.5.4 Corporate assets

One problem that arises when dividing an entity into separate CGUs is dealing with corporate assets.
Corporate assets, such as the headquarters building or the information technology support centre, are
integral to all CGUs generating cash flows but do not independently generate cash flows. In section 7.5.1,
the example of the McCafé McDonald’s restaurant was used. If such a restaurant has two CGUs, namely

the coffee and pastries CGU and the hamburgers and fries CGU, then the McDonald’s building is a cor-
porate asset — it is used by both CGUs.
Paragraph 102 of AASB 136/IAS 36 describes the two steps in accounting for impairment losses
where corporate assets exist. To illustrate these two steps, assume the CGU being tested for impairment
is the coffee and pastries CGU within the McCafé entity.
Step 1
If any corporate assets can be allocated on a reasonable and consistent basis to CGUs, then this should
be done. Each CGU is then, where appropriate, tested for an impairment loss. Where a loss occurs in a
CGU, the loss is allocated pro rata across the assets, including the portion of the corporate asset allo-
cated to the CGU. In the McCafé example, this procedure would occur if the carrying amount of the
building could be allocated across the two CGUs.
Step 2
If any corporate assets cannot be allocated across the CGUs, the entity should:
•• compare the carrying amount of each CGU being tested (excluding the unallocated corporate asset)
with its recoverable amount and recognise any impairment loss by allocating the loss across the
assets of the CGU. Using the McCafé example, this would mean testing the carrying amounts of
the assets of the coffee and pastries CGU, excluding any amount for buildings, with the recoverable
amount of the CGU.
•• identify the smallest CGU that includes the unit under review and to which a portion of the unallocated
corporate asset can be allocated on a reasonable and consistent basis. Using the McCafé example, the
smallest group of CGUs containing the unallocated building asset is the entity as a whole.
•• compare the carrying amount of the smallest group of CGUs containing the corporate asset with its
recoverable amount. Any impairment loss is then allocated across the assets of this group of CGUs,
including the corporate asset. Using the McCafé example, the recoverable amount of the entity as a
whole is compared with the sum of the carrying amount of the building and the carrying amounts of
each of the two CGUs (after any adjustment for impairment).
Illustrative example 7.7 contains an example of accounting for corporate assets. One of the corpo
rate assets is allocated across the two CGUs, while the other corporate asset cannot be allocated across
the CGUs.
Allocation of corporate assets

Elements Ltd has two CGUs, Bronze and Empire. The assets of the two units are as follows.
Bronze CGU Empire CGU

Plant $500 $400
Land 300 220
The entity has two corporate assets: the headquarters building and a research centre. The head-
quarters is assumed to be used equally by both units. The carrying amount of the research centre
cannot be allocated on a reasonable basis to the two units. The headquarters building has a carrying
amount of $160. The research centre’s assets consist of furniture of $40 and equipment of $30. Neither
of the corporate assets produces cash flows for the entity.
The recoverable amounts of the two CGUs are as follows.
Bronze CGU $900

Empire CGU $665

Required
Account for the corporate assets.
Solution
The first step is to calculate the impairment losses for each of the CGUs. To do this, the carrying amount
of the headquarters building is allocated equally between the two units as it is used equally by the
CGUs. Impairment losses are then as follows.
Bronze Empire
Plant $500 $400

Land 300 220
Headquarters building 80 80
Carrying amount 880 700
Recoverable amount 900 665
Impairment loss 0 35
The impairment loss of $35 for Empire is then allocated across all non‐excluded assets in that CGU.
Adjusted
Carrying Proportion carrying
amount of loss Loss amount
Plant $400 400/700 $20 $380

Land 220 220/700 11 209
Headquarters building 80 80/700 4 76
$700 $35 $665
The second step is to deal with the research centre. This requires the determination of any impair-
ment loss for the smallest CGU that includes the research centre. In this case, the smallest CGU is the
entity as a whole. The impairment loss is calculated as follows.
Bronze CGU
Plant $ 500
Land 300
Empire CGU
Plant 380
Land 209
Headquarters building [$80 + $76] 156
Research centre
Furniture 40
Equipment 30
1 615
Recoverable amount [$900 + $665] 1 565
Impairment loss $ 50

This impairment loss is then allocated across these assets on a pro rata basis.
Carrying Proportion Adjusted

amount of loss Loss carrying amount
Bronze CGU
Plant $ 500 500/1615 $15 $ 485
Land 300 300/1615 9 291
Empire CGU
Plant 380 380/1615 12 368
Land 209 209/1615 7 202
Headquarters building 156 156/1615 5 151
Research centre
Furniture 40 40/1615 1 39
Equipment 30 30/1615 1 29
$1 615 $50 $1 565
LEARNING CHECK
■■ A CGU is the smallest identifiable group of assets that generates cash inflows that are largely
independent of the cash inflows from other assets or groups of assets.
■■ AASB 136/IAS 36 provides indicators or guidelines to help determine the CGUs in an entity.
■■ For the purposes of impairment testing, goodwill is allocated to the various CGUs or groups of
CGUs of an entity.
■■ In allocating impairment losses in a CGU the loss is first allocated to any goodwill.
■■ Where an impairment loss occurs in a CGU and either no goodwill exists or the goodwill has been
previously written‐off, the impairment loss is allocated across the carrying amounts of the remaining
assets in the unit.
■■ There are restrictions on how much an individual asset in a CGU can be written down in the
allocation process.
■■ Corporate assets should be allocated to CGUs if possible; otherwise they are tested within the
smallest unit that contains the corporate asset.
7.6 Reversal of an impairment loss

LEARNING OBJECTIVE 7.6 Explain when an impairment loss can be reversed and how to account for it.
If an entity has written down some assets as a result of incurring an impairment loss, can the entity, in a
subsequent period, reverse that loss? A reversal would allow the entity to write the assets up, and recog-
nise the increase as income. According to paragraph 110 of AASB 136/IAS 36:
An entity shall assess at the end of each reporting period whether there is any indication that an impairment
loss recognised in prior periods for an asset other than goodwill may no longer exist or may have been
decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.
In assessing whether there is any indication of an impairment reversal, paragraph 111 of AASB 136/
IAS 36 states that an entity shall consider, as a minimum, the following indications.
External sources of information
(a) the asset’s market value has increased significantly during the period.
(b) significant changes with a favourable effect on the entity have taken place during the period, or will take
place in the near future, in the technological, market, economic or legal environment in which the entity
operates or in the market to which the asset is dedicated.

(c) market interest rates or other market rates of return on investments have decreased during the period,
and those decreases are likely to affect the discount rate used in calculating the asset’s value in use and
increase the asset’s recoverable amount materially.
Internal sources of information
(d) significant changes with a favourable effect on the entity have taken place during the period, or are
expected to take place in the near future, in the extent to which, or manner in which, the asset is used or
is expected to be used. These changes include costs incurred during the period to improve or enhance the
asset’s performance or restructure the operation to which the asset belongs.
(e) evidence is available from internal reporting that indicates that the economic performance of the asset is,
or will be, better than expected.
The procedure with a reversal is the same as for determining an impairment loss. An entity must
determine by an assessment of external and internal sources of information that there is evidence to indi-
cate the reversal of an impairment loss. The sources of information are the same as those for assessing
the indication of an impairment loss except that whereas with an impairment loss the evidence suggested
bad news, with a reversal the evidence shows good news.
7.6.1 Individual assets

The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss
shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation)
had no impairment loss been recognised for the asset in prior years.
The reason for this restriction is the application of the historical cost model. To increase an asset above the
carrying amount calculated using the historical model would effectively involve a revaluation of the asset.
A reversal of an impairment loss for an asset other than goodwill shall be recognised immediately in profit
or loss, unless the asset is carried at revalued amount in accordance with another Standard (for example, the
revaluation model in AASB 116 [IAS 16]). Any reversal of an impairment loss of a revalued asset shall be
treated as a revaluation increase in accordance with that other Standard.
So, under the cost model an increase in the carrying amount of an asset is recognised immediately in
profit or loss. The basic form of the journal entry, using a depreciable asset, is as follows.
Accumulated depreciation and impairment loss Dr xxx

Income — impairment loss reversal Cr xxx
(Reversal of impairment loss)
This procedure is demonstrated in illustrative example 7.8.

Under the revaluation model, the increase is treated as a revaluation increase in accordance with
AASB 116/IAS 16. In general this means the recognition of an asset revaluation surplus. If the
increase reversed a previous decrease recognised in profit or loss then it would be recognised as income.
Subsequent to the recognition of a reversal, management needs to reassess the depreciation/amor
tisation of the asset. This involves assessment of such variables as expected future life, residual value
and pattern of benefit to be received.
7.6.2 Cash‐generating units

A reversal of an impairment loss for a cash‐generating unit shall be allocated to the assets of the unit,
except for goodwill, pro rata with the carrying amounts of those assets. These increases in carrying amounts
shall be treated as reversals of impairment losses for individual assets and recognised in accordance with
paragraph 119.

The accounting for the reversals for each asset is done as discussed earlier for reversals of individual
assets.
In allocating a reversal of an impairment loss for a cash‐generating unit in accordance with paragraph 122,
the carrying amount of an asset shall not be increased above the lower of:
(a) its recoverable amount (if determinable); and
(b) the carrying amount that would have been determined (net of amortisation or depreciation) had no impair-
ment loss been recognised for the asset in prior periods.
The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset shall
be allocated pro rata to the other assets of the unit, except for goodwill.
Paragraph 124 imposes a further restriction on reversing a previous impairment loss with a definitive
statement in relation to goodwill:
An impairment loss recognised for goodwill shall not be reversed in a subsequent period.
The rationale for this is that increasing the carrying amount of goodwill would be seen as recognising
internally generated goodwill, which is not allowed under AASB 138/IAS 38 Intangible Assets.
The procedure for reversing impairment losses in a CGU is demonstrated in illustrative example 7.8.
Reversal of an impairment loss

At 30 June 2020, Owl Ltd incurred an impairment loss of $5000, of which $3000 was used to write off
the goodwill and $2000 to write down the other assets. The allocation of the impairment loss to these
other assets was as follows.
Carrying Proportion Impairment Adjusted

amount of loss loss carrying amount
Land $10 000 1/5 $ 400 $ 9 600

Plant 40 000 4/5 1 600 38 400
$50 000 $ 2 000
The plant had previously cost $100 000 and was

being depreciated at 10% p.a. prior to 30 June 2020,
requiring a depreciation charge of $10 000 p.a. Subse-
quent to the impairment, the asset was depreciated on
a straight‐line basis over 3 years, being $12 800 p.a.
At 30 June 2021 the business situation had
improved and the entity believed that it should reverse
past impairment losses. A comparison of the car-
rying amounts of the assets at 30 June 2021 and their
recoverable amount revealed the following.
Land $ 9 600
Plant [$38 400 − $12 800] 25 600
Furniture (acquired during the current period) 800
Carrying amount 36 000
Recoverable amount 38 800
Excess of recoverable amount over carrying amount 2 800

Required
Reverse the impairment loss.
Solution
The excess cannot be allocated to goodwill as impairment losses on goodwill can never be reversed.
If the excess is allocated to the assets it can only be allocated to the assets existing at the previous
impairment write‐down as assets cannot be written up above their original cost. The excess of recover-
able amount is then allocated to the relevant assets on a pro rata basis.
Carrying Share of Adjusted

amount reversal carrying amount
Land $ 9 600 $ 764 $10 364

Plant 25 600 2 036 27 636
$35 200 $ 2 800 38 000
These assets cannot be written up above the amounts that they would have been recorded at if there
had been no previous impairment. These amounts would be as follows.
Land $10 000
Plant $30 000 [$40 000 less $10 000 depreciation for the 2020–21 year]
Writing plant up to $27 636 does not exceed the maximum write‐up amount of $30 000. However, the
land cannot be written up above $10 000. This means that $364 of the $764 that was allocated to the
land must be reallocated to the plant. This increases the carrying amount of the plant to $28 000 (being
$27 636 + $364). This is still less than the maximum of $30 000.
The journal entry to record the reversal of the impairment loss is as follows.
Accumulated impairment losses — land Dr 400

Accumulated depreciation and impairment loss — plant Dr 2 400
Income — impairment loss reversal Cr 2 800
(Reversal of impairment loss)
If the allocation of the excess of recoverable amount over carrying amount exceeded the maximum
write‐up amounts, then not all the excess would be recognised as income.
LEARNING CHECK
■■ Impairment losses from prior periods may be reversed.

■■ The assessment of possible reversal is based on an analysis of external and internal indicators.
■■ For an individual asset, a reversal of an impairment loss will result in an entity recognising income,
depending on the measurement model being used.
■■ Impairment losses for goodwill cannot be reversed.
■■ AASB 136/IAS 36 restricts the amount by which impairment losses for other assets can be
reversed, in particular requiring that the new carrying amount after the reversal cannot exceed the
recoverable amount or the carrying amount that would have been determined had no impairment
loss been recognised for the asset in previous periods.

7.7 Disclosure
LEARNING OBJECTIVE 7.7 Identify the disclosures required in relation to impairment of assets.
Paragraph 126 of AASB 136/IAS 36 requires that:
An entity shall disclose the following for each class of assets:
(a) the amount of impairment losses recognised in profit or loss during the period and the line item(s) of the
statement of comprehensive income in which those impairment losses are included.
(b) the amount of reversals of impairment losses recognised in profit or loss during the period and the line
item(s) of the statement of comprehensive income in which those impairment losses are reversed.
(c) the amount of impairment losses on revalued assets recognised in other comprehensive income during
the period.
(d) the amount of reversals of impairment losses on revalued assets recognised in other comprehensive
income during the period.
Paragraph 130 of AASB 136/IAS 36 requires that for each material impairment loss recognised or
reversed during the period for an individual asset, including goodwill, or a CGU, an entity must also disclose:
•• the events and circumstances that led to the recognition or reversal of the impairment loss
•• the amount of any impairment loss recognised or reversed
•• for an individual asset: the nature of the asset
•• for a CGU:
–– a description of the CGU (e.g. a business operation or geographical area)
–– the amount of the impairment loss recognised or reversed by class of assets
•• whether the recoverable amount of asset or CGU is its fair value less costs of disposal or its value in use
•• if recoverable amount is fair value less costs of disposal, the basis of the measurement
•• if recoverable amount is value in use, the discount rates used.
Paragraphs 134 and 135 of AASB 136/IAS 36 specify detailed disclosure requirements in relation to
the estimates used to measure recoverable amounts of CGUs containing goodwill and other intangible
assets with indefinite lives. These details include:
•• carrying amounts of such assets
•• the basis for determining recoverable amount (i.e. value in use or fair value less costs of disposal)
•• a description of key assumptions and approaches used in estimating value in use and fair value less
costs of disposal (e.g. projected growth rates, discount rates and time periods used).
Figure 7.7 is an extract from Santos Limited’s 2015 annual report, disclosing details of its $3.9 billion
impairment charge during the reporting period.
FIGURE 7.7 Disclosures relating to impairment charges, Santos Limited
Notes to the consolidated financial statements

Section 3: Capital expenditure, operating assets and restoration obligations
3.3 IMPAIRMENT OF NON‐CURRENT ASSETS
The carrying amounts of the Group’s oil and gas assets are reviewed at each reporting date to determine
whether there is any indication of impairment. Where an indicator of impairment exists, a formal estimate
of the recoverable amount is made.
Indicators of impairment — exploration and evaluation assets
The carrying amounts of the Group’s exploration and evaluation assets are reviewed at each reporting
date, to determine whether any of the following indicators of impairment exists:
(i) tenure over the licence area has expired during the period or will expire in the near future, and is not
expected to be renewed; or

(ii) substantive expenditure on further exploration for, and evaluation of, mineral resources in the specific
area is not budgeted or planned; or
(iii) exploration for, and evaluation of, resources in the specific area have not led to the discovery of commer-
cially viable quantities of resources, and the Group has decided to discontinue activities in the specific
area; or
(iv) sufficient data exists to indicate that although a development is likely to proceed, the carrying amount
of the exploration and evaluation asset is unlikely to be recovered in full from successful development or
from sale.
Cash generating units — oil and gas assets
Oil and gas assets, land, buildings, plant and equipment are assessed for impairment on a cash‐
generating unit basis. A cash‐generating unit is the smallest grouping of assets that generates indepen-
dent cash inflows, and generally represents an individual oil or gas field. Impairment losses recognised
in respect of cash‐generating units are allocated to reduce the carrying amount of the assets in the unit
on a pro‐rata basis.
Individual assets within a cash‐generating unit may become impaired if their ongoing use changes or
that the benefits to be obtained from ongoing use are likely to be less than the carrying value of the indi-
vidual asset. An impairment loss is recognised in the income statement whenever the carrying amount
of an asset or its cash‐generating unit exceeds its recoverable amount.
Recoverable amount
The recoverable amount of an asset is the greater of its fair value less costs of disposal (‘FVLCD’)
(based on level 3 fair value hierarchy) and its value‐in‐use (‘VIU’), using an asset’s estimated future
cash flows (as described below) discounted to their present value using a pre‐tax discount rate
that reflects current market assessments of the time value of money and the risks specific to the
asset.
Significant judgement — Impairment of oil and gas assets
For oil and gas assets, the expected future cash flow estimation is based on a number of factors, vari-
ables and assumptions, the most important of which are estimates of reserves, future production pro-
files, commodity prices, costs and foreign exchange rates. In most cases, the present value of future
cash flows is most sensitive to estimates of future oil price and discount rates.
The estimated future cash flows for the VIU calculation are based on estimates, the most significant of
which are 2P hydrocarbon reserves, future production profiles, commodity prices, operating costs and
any future development costs necessary to produce the reserves. Under a FVLCD calculation, future
cash flows are based on estimates of 2P hydrocarbon reserves in addition to other relevant factors such
as value attributable to additional resource and exploration opportunities beyond 2P reserves based on
production plans.
Estimates of future commodity prices are based on the Group’s best estimate of future market prices
with reference to external market analysts’ forecasts, current spot prices and forward curves. Future
commodity prices are reviewed at least annually. Where volumes are contracted, future prices are based
on the contracted price. Future prices (US$/bbl) used were:
2016 2017 2018 20191 20201 20211

40.00 60.00 70.00 80.77 82.79 84.86
1Based
on US$75/bbl (2016 real) from 2019 escalated at 2.5%.
Forecasts of the foreign exchange rate for foreign currencies, where relevant, are estimated with reference
to observable external market data and forward values, including analysis of broker and consensus estimates.
The future estimated rate applied is A$/US$ of 0.70 in 2016 and 2017, and A$/US$ of 0.75 in all subsequent
years.
The discount rates applied to the future forecast cash flows are based on the Group’s weighted average
cost of capital, adjusted for risks where appropriate, including functional currency of the asset, and risk pro-
file of the countries in which the asset operates. The range of pre‐tax discount rates that have been applied
to non‐current assets is between 9.0% and 17.9%.

In the event that future circumstances vary from these assumptions, the recoverable amount of the
Group’s oil and gas assets could change materially and result in impairment losses or the reversal of
previous impairment losses.
Due to the interrelated nature of the assumptions, movements in any one variable can have an indirect
impact on others and individual variables rarely change in isolation. Additionally, management can be
expected to respond to some movements, to mitigate downsides and take advantage of upsides, as cir-
cumstances allow. Consequently, it is impracticable to estimate the indirect impact that a change in one
assumption has on other variables and hence, on the likelihood, or extent, of impairments or reversals of
impairments under different sets of assumptions in subsequent reporting periods.
2015 2014
Impairment expense Note $million $million
Current asset
Assets held for sale 3.6 32 —
Other assets 6 9
Total impairment of current assets 38 9
Non-current assets
Exploration and evaluation assets 685 1 170
Oil and gas assets 3 201 1 163
Investments in joint ventures 6.3(b) — 14
Total impairment of non‐current assets 3 886 2 347
Total impairment 3 924 2 356
Recoverable amounts and resulting impairment write‐downs recognised in the year ended
31 December 2015 are:
Subsurface Plant and Recoverable

assets equipment Total amount1
2015 Segment $million $million $million $million
Exploration and evaluation assets:
Gunnedah Basin Eastern Australia 563 25 588 nil
Cooper — unconventional resources Eastern Australia 23 — 23 102
Papua New Guinea Asia Pacific 52 — 52 112
Malaysia Asia Pacific 22 — 22 104
Total impairment of exploration and evaluation assets 660 25 685
Oil and gas assets‐producing:
Cooper Basin Eastern Australia 783 1 312 2 095 1 371
Mereenie Eastern Australia — 13 13 62
Patricia Baleen Eastern Australia 10 7 17 26
Barrow WA&NT 96 152 248 64
WA&NT oil assets WA&NT 73 19 92 25
Vietnam (Chim Sáo/Dua) Asia Pacific 64 42 106 162
SE Gobe Asia Pacific 1 5 6 nil
GLNG GLNG 224 341 565 9 414
Denison GLNG 20 39 59 nil
Total impairment of oil and gas assets 1 271 1 930 3 201
Total impairment of non‐current assets 1 931 1 955 3 886
1Recoverable amounts represent the carrying values of assets before deducting the carrying value of restoration liabilities. All
producing oil and gas asset amounts are calculated using the VIU method, whilst all exploration and evaluation asset amounts use
the FVLCD method.
The impairment charges noted above primarily result from the lower oil price environment and, in some
cases, a consequential reduction or delay in future capital expenditure that diminishes or removes the path to
commercialisation.

As the CGUs above have been written down to their respective recoverable amounts, any change in
key assumptions on which the valuations are based would further impact asset carrying values. When
modelled in isolation, it is estimated that changes in the key assumptions would result in the following
additional impairment in 2015 on the CGUs which are already impaired:
Discount rate Oil price decrease

increase 0.50% US$5/bbl all years
Sensitivity $million $million
Cooper Basin 95 487
Mereenie 4 11
Patricia Baleen 1 nil
Barrow 2 18
WA&NT oil assets 1 7
Vietnam (Chim Sáo/Dua) 2 27
GLNG 551 1 010
As identified above, the impact of changes in key assumptions such as 2P reserves, production levels,
commodity prices and discount rates are significant on the determination of recoverable amount. Due to
the number of factors that could impact any of these assumptions, as well as any actions taken to respond
to adverse changes, actual future determinations of recoverable amount may vary from those stated above.
Source: Santos Limited (2015, pp. 80–3).
LEARNING CHECK
■■ AASB 136/IAS 36 requires extensive disclosures regarding impairment of assets.

■■ Impairment losses and reversals of impairment losses must be separately disclosed for each class of asset.
■■ Any material impairment losses and reversals of impairment losses must be disclosed for any individual
asset, including goodwill, or a CGU as well as details of the events and circumstances leading to these.
■■ Because of the judgements required in measuring variables such as value in use, AASB 136/IAS 36
requires disclosures about estimates and judgements made in the impairment testing process.

SUMMARY
The key principles of accounting for impairment of assets contained in AASB 136/IAS 36 Impairment
of Assets are as follows.
•• The purpose of the impairment test is to ensure that the carrying amounts of assets are recoverable;
that is, assets are not overstated.
•• For an entity to conduct an impairment test there must be indications of impairment determined by
analysing various internal and external sources of information.
•• The impairment test involves comparing the carrying amounts of assets with their recoverable
amounts, the latter determined as the higher of fair value less costs of disposal and value in use.
•• Impairment tests may be conducted on separate assets with impairment losses being recognised
immediately in profit or loss.
•• As many assets do not independently produce cash flows, the impairment test may be conducted on a
group of assets, known as a CGU.
•• Where a CGU incurs an impairment loss, the loss is written off against any recorded goodwill, and
any balance then allocated on a pro rata basis across the assets of the CGU.
•• Where improvements occur in the recoverable amounts of assets, impairment losses may be reversed,
except in the case of goodwill.
KEY TERMS
amortisation The systematic allocation of the depreciable amount of an intangible asset over its useful life.
carrying amount The amount at which an asset or liability is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses and allowances thereon.
cash‐generating unit The smallest identifiable group of assets that generates cash inflows that are
largely independent of the cash inflows from other assets or groups of assets.
corporate assets Assets other than goodwill that contribute to the future cash flows of both the CGU
under review and other CGUs.
costs of disposal Incremental costs directly attributable to the disposal of an asset or cash‐generating
unit, excluding finance costs and income tax expense.
depreciation The systematic allocation of the depreciable amount of an asset over its useful life.
fair value The price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
impairment loss The amount by which the carrying amount of an asset or a cash‐generating unit
exceeds its recoverable amount.
recoverable amount The higher of an asset’s fair value less costs of disposal and its value in use.
useful life The period over which an asset is expected to be available for use by an entity; or the
number of production or similar units expected to be obtained from the asset by an entity.
value in use The present value of the future cash flows expected to be derived from an asset or
cash‐generating unit.
DEMONSTRATION PROBLEMS
7.1 Impairment losses, no corporate assets
Sarah Ltd has two divisions, Arena and Gibbs, each of which is a separate CGU. Sarah Ltd adopts
a decentralised management approach and unit managers are expected to operate their units. How-
ever, one corporate asset — the information technology network — is centrally controlled and
provides a computer network to the company as a whole. The information technology network is
not a depreciable asset.

At 30 June 2020 the net assets of each division, including its allocated share of the information
technology network, were:
Arena Gibbs
Information technology (IT) network $ 284 000 $ 116 000

Land 450 000 290 000
Plant (20% p.a. straight‐line depreciation) 1 310 000 960 000
Accumulated depreciation (plant) (917 000) (384 000)
Goodwill 46 000 32 000
Patent (10% straight‐line amortisation) 210 000 255 000
Accumulated amortisation (patent) (21 000) (102 000)
Cash 20 000 12 000
Inventories 120 000 80 000
Receivables 34 000 40 000
1 536 000 1 299 000
Liabilities (276 000) (189 000)
Net assets $1 260 000 $1 110 000
Additional information as at 30 June 2020

•• Arena’s land had a fair value less costs of disposal of $437 000.
•• Gibbs’ patent had a carrying amount below fair value less costs of disposal.
•• Gibbs’ plant had a fair value less costs of disposal of $540 000.
•• Receivables were considered to be collectable.
Required
Sarah Ltd’s management undertook impairment testing at 30 June 2020 and determined the recov-
erable amount of each CGU to be: $1 430 000 for Arena and $1 215 000 for Gibbs. Prepare any
journal entries necessary to record the results of the impairment testing for each of the CGUs.
Solution
Step 1
Determine whether either CGU has an impairment loss. This is done by comparing the carrying
amount of the assets of each CGU with the recoverable amount of these assets. Note that it is the
carrying amount of the assets, not the net assets, that is used — the test is for the impairment of
assets, not net assets.
Arena Gibbs
Carrying amount of assets $1 536 000 $1 299 000
Recoverable amount 1 430 000 1 215 000
Impairment loss $ (106 000) $ (84 000)
As a result of the comparison, both CGUs have suffered impairment losses.

Step 2
For each CGU, the impairment loss is used to write off any goodwill and then to allocate any bal-
ance across the other assets in proportion to their carrying amounts.
Arena CGU
Arena has goodwill of $46 000. Therefore, the first step is to write off goodwill of $46 000. The
second step is to allocate the remaining impairment loss of $60 000 (i.e. $106 000 – $46 000).
Note that although all the assets are included in the calculation to determine whether the CGU
has incurred an impairment loss, the allocation of that loss is only to those assets that will be
written down as a result of the allocation process. Cash and receivables are not written down as
they are recorded at amounts equal to fair value. The inventories are recorded under AASB 102/
IAS 2 at the lower of cost and net realisable value and, as such, are excluded from the impairment

test write‐down under AASB 136/IAS 36. The allocation of the balance of the impairment loss is
done on a pro rata basis, in proportion to the assets’ carrying amounts.
Allocation Adjusted carrying

Carrying amount Proportion of loss amount
IT network $ 284 000 284/1 316 $12 948 $271 052

Land 450 000 450/1 316 20 517 429 483
Plant 393 000 393/1 316 17 918 375 082
Patent 189 000 189/1 316 8 617 180 383
$ 1 316 000 $60 000
After the initial allocation across the assets, a check has to be made on the amount of each write‐
down, as AASB 136/IAS 36 (paragraph 105) places limitations on the amount to which assets can be
written down. For each asset the carrying amount should not be reduced below the highest of:
•• its fair value less costs of disposal
•• its value in use
•• zero.
In this example, the land has a fair value less costs of disposal of $437 000. Hence, it cannot be
written down to $429 483 as per the above allocation table. Only $13 000 (to write the asset down
from $450 000 to $437 000) of the impairment loss can be allocated to it. Therefore, the remaining
$7517 allocated loss (i.e. $20 517 – $13 000) must be allocated to the other assets. This allocation is
based on the adjusted carrying amounts, which are shown in the right‐hand column of the previous table.
Adjusted
Carrying amount Proportion Allocation of loss carrying amount
IT network $ 271 052 271 052/826 517 $ 2 465 $ 268 587

Plant 375 082 375 082/826 517 3 411 371 671
Patent 180 383 180 383/826 517 1 641 178 742
$ 826 517 $ 7 517
The impairment loss for each asset is then based, where relevant, on the accumulation of both
allocations. The subsequent write‐downs are accounted for by increasing the respective contra‐
asset amounts of each asset.
The journal entry for Arena is:

Accumulated depreciation and impairment losses — IT network
[$12 948 + $2465] Cr 15 413
Accumulated depreciation and impairment losses — plant
[$17 918 + $3411] Cr 21 329
Accumulated amortisation and impairment losses — patent
[$8617 + $1641] Cr 10 258
Gibbs CGU
As with the Arena CGU, the impairment loss is used to write off the goodwill balance, $32 000,
and then the balance of the impairment loss, $52 000 (i.e. $84 000 – $32 000), is allocated across
the remaining assets, except for cash, receivables and inventories. Further, no impairment loss can
be allocated to the patent, as its carrying amount is below fair value less costs of disposal.

Adjusted
IT network $ 116 000 116/982 $ 6 143 $ 109 857

Land 290 000 290/982 15 356 274 644
Plant 576 000 576/982 30 501 545 499
$ 982 000 $52 000
Because the plant has a fair value less costs of disposal of $540 000 and this is below the
adjusted carrying amount of $545 499, the full impairment loss of $30 501 can be allocated to it.
The journal entry for Gibbs is:

Accumulated depreciation and impairment losses — IT network Cr 6 143
Accumulated depreciation and impairment losses — plant Cr 30 501
7.2 Impairment losses, corporate asset

Skaro Ltd has three CGUs, a head office and a research facility. The carrying amounts of the assets
and their recoverable amounts are as follows.
Research
Unit A Unit B Unit C Head office facility Skaro Ltd
Carrying amount $100 $150 $200 $150 $50 $650

Recoverable amount 129 164 271 584
The assets of the head office are allocable to the three units as follows:
•• Unit A: $19
•• Unit B: $56
•• Unit C: $75.
The assets of the research facility cannot be reasonably allocated to the CGUs.
Required
Assuming all assets can be adjusted for impairment, prepare the journal entry relating to any
impairment of the assets of Skaro Ltd.
Solution
For each CGU, a comparison is required between the carrying amounts and recoverable amounts
of the assets of the CGU to determine which, if any, of the CGUs is impaired. As the asset of the
head office can be allocated to each of the units, the carrying amounts of each of the CGUs must
then include the allocated part of the head office.
Calculation of impairment losses for CGUs
Unit A Unit B Unit C

Carrying amount $119 $206 $275
Recoverable amount 129 164 271
Impairment loss 0 42 4

Because the assets of Unit A are not impaired, no write‐down is necessary. For Units B and C,
the impairment losses must be allocated to the assets of the units. The allocation is in proportion
to the carrying amounts of the assets.
Allocation of impairment loss
Unit B Unit C
To head office $11 [42 × 56/206] $1 [4 × 75/275]
To other assets 31 [42 × 150/206] 3 [4 × 200/275]
42 4
In relation to the research centre, the assets of the centre cannot be allocated to the units, so the
impairment test is based on the smallest CGU that contains the research centre, which in this case
is the entity as a whole, Skaro Ltd. For this calculation, the carrying amounts of the assets of the
units as well as the head office are reduced by the impairment losses already allocated. The total
assets of Skaro Ltd consist of all the assets of the entity.
Impairment testing for Skaro Ltd as a whole
Unit A Unit B Unit C Head office Research centre Skaro Ltd

Carrying amount 100 150 200 150 50 650
Impairment loss — 31 3 12 — 46
Net 100 119 197 138 50 604
Recoverable amount 584
Impairment loss 20
Because the carrying amount of the assets of Skaro Ltd is less than the recoverable amount of
the entity, the entity has incurred an impairment loss. This loss is allocated across all the assets of
the entity in proportion to their carrying amounts.
Allocation of impairment loss
Adjusted
Unit A $100 100/604 × 20 $ 3 $ 97
Unit B 119 119/604 × 20 4 115
Unit C 197 197/604 × 20 6 191
Head office 138 138/604 × 20 5 133
Research centre 50 50/604 × 20 2 48
$604 $20 584
Journal entry for impairment loss

The journal entry for the impairment loss recognises the reduction in each of the assets. As the
composition of the assets is not detailed in this question, the credit adjustments are made against
the aggregated asset accounts. They could also have been made against an accumulated depreci
ation and impairment losses account. If the composition of each of the assets of each unit had been
given, the impairment loss would have been allocated to specific assets rather than assets as a total
category as in the solution here.

Impairment loss Dr 66
Assets — Unit A Cr 3
Assets — Unit B (31 + 4) Cr 35
Assets — Unit C (3 + 6) Cr 9
Assets — Head office (12 + 5) Cr 17
Assets — Research facility Cr 2
COMPREHENSION QUESTIONS
1 What is an impairment test?
2 Why is an impairment test considered necessary?
3 When should an entity conduct an impairment test?
4 What are some external indicators of impairment?
5 What are some internal indicators of impairment?
6 What is meant by recoverable amount?
7 How is an impairment loss calculated in relation to a single asset accounted for?
8 What are the limits to which an asset can be written down in relation to impairment losses?
9 What is a cash‐generating unit (CGU)?
10 How are impairment losses accounted for in relation to cash‐generating units?
11 Are there limits in adjusting assets within a cash‐generating unit when impairment losses occur?
12 How is goodwill tested for impairment?
13 What is a corporate asset?
14 How are corporate assets tested for impairment?
15 When can an entity reverse past impairment losses?
16 What are the steps involved in reversing an impairment loss?
CASE STUDY 7.1

INDICATIONS AND DETERMINATION OF IMPAIRMENT LOSSES
BHP Billiton released the following announcement to investors and media on 15 January 2016.
Onshore US asset review

BHP Billiton expects to recognise an impairment charge of approximately US$4.9 billion post‐tax (or
approximately US$7.2 billion pre‐tax) against the carrying value of its Onshore US assets. This charge will
be recognised as an exceptional item in the financial results for the half year ended 31 December 2015.
The impairment follows the bi‐annual review of the Company’s asset values and reflects changes to
price assumptions, discount rates and development plans which have more than offset substantial prod-
uctivity improvements. The impairment will reduce Onshore US net operating assets to approximately
US$16 billion1.
The oil and gas industry has recently experienced significant volatility and much weaker prices.
The US gas price remains low as industry‐wide productivity improvements have resulted in higher
than expected supply at lower cost. BHP Billiton has previously suspended development of its dry gas
acreage. The Company has now also reduced its medium and long‐term gas price assumptions.
In addition, the oil price has fallen by more than 30 per cent over the last three months following the
disruption of OPEC and stronger than anticipated non‐OPEC production. Although we expect prices to
improve from their current lows, we have reduced our oil price assumptions for the short to medium
term. Our long‐term price assumptions continue to reflect the market’s attractive supply and demand
fundamentals.

The increased volatility in prices has also increased the discount rates applied by BHP Billiton, which
has a significant flow through impact on the Company’s assessment of its Onshore US asset value.
The Group will reduce the number of operated rigs in its Onshore US business from seven to five in the
March 2016 quarter. This will comprise three rigs in the Black Hawk and two rigs in the Permian. Beyond
this, investment and development plans for the remainder of the 2016 financial year are under review, with
a focus on preserving cash flow.
BHP Billiton Chief Executive Officer, Andrew Mackenzie, said ‘Oil and gas markets have been signif-
icantly weaker than the industry expected. We responded quickly by dramatically cutting our operating
and capital costs, and reducing the number of operated rigs in the Onshore US business from 26 a year
ago to five by the end of the current quarter.
‘While we have made significant progress, the dramatic fall in prices has led to the disappointing write
down announced today. However, we remain confident in the long‐term outlook and the quality of our
acreage. We are well positioned to respond to a recovery.’
The broader carrying value assessment of the Group’s assets will be finalised in conjunction with the
interim financial results to be released on 23 February 2016.
1
This excludes a deferred tax liability of approximately US$4 billion.
Source: BHP Billiton (2016).
Required
1. Describe the process undertaken by BHP Billiton in determining:
(a) its assets may have been impaired
(b) the value of the impairment losses.
2. In percentage terms, what was the extent of BHP Billiton’s impairment charge against its Onshore
US assets?
3. Explain the impact of an impairment loss on a company’s gearing ratio.
CASE STUDY 7.2

DETERMINATION OF CGUs
The Scenic City Council contracts out the bus routes in and around Scenic City to various subcontractors
based on a tender arrangement. Some routes, such as the Express to City routes, are quite profitable,
while others, such as those transporting schoolchildren to and from school in the more remote areas, are
unprofitable or only barely profitable. As a result, to ensure the unprofitable and less profitable routes
are serviced, the council requires tenderers to take a package of routes, some profitable, some less so.
The Saferide Bus Company has won a contract to provide bus services to the Scenic City Council.
The contract to operate its buses involves a package of five separate routes, one of which operates at a
significant loss. Specific buses are allocated by the Saferide Bus Company to each route, and cash flows
can be isolated to each route because drivers and takings are specific to each route.
Required
Based on the information given above, write a report to the accountant of Saferide Bus Company which
includes the following information.
1. An explanation of why impairment testing may require the use of CGUs, rather than being based on
a single asset.
2. An explanation of the factors that should be considered in determining a CGU for Saferide Bus
Company.
3. Your determination as to the identification of CGUs for the Saferide Bus Company.

CASE STUDY 7.3
GOODWILL WRITE‐OFFS
Gu and Lev (2011) argue that the root cause of many goodwill write‐offs is that the shares of the buyer
are overpriced at the acquisition date.
Figure 7.8 presents eBay’s cumulative stock return against the S&P 500 index from 2003. In mid‐
September 2005, eBay acquired the internet phone company Skype for $2.6 billion. On 1 October 2007,
it announced a massive goodwill write‐off of $1.43 billion (55% of the acquisition price) related to the
Skype acquisition.
Gu and Lev argue that the root cause of this behaviour is the incentives of managers of overvalued
firms to acquire businesses, whether to exploit the overpricing for shareholders’ benefit or to justify and
prolong the overpricing to maintain a facade of growth. Goodwill write‐offs are accordingly an impor-
tant business event signalling a flawed investment strategy.
FIGURE 7.8 eBay vs S&P 500: The Skype acquisition — cumulative stock returns
145%
Acquired Skype
eBay Wrote off goodwill
($1.43b)
95%
45%
S&P500
−5%
−55%
2003 2004 2005 2006 2007 2008
Source: Gu & Lev (2011, p. 1996).
Required
1. Explain the circumstances under which goodwill is recognised and how any subsequent write‐off occurs.
2. Explain why a significant goodwill write‐off may signal a ‘flawed investment strategy’.
CASE STUDY 7.4

IMPAIRMENT UNDER THE REVALUATION MODEL
‘Impairment is only relevant to assets carried under the cost model. For assets carried under the revalu-
ation model, such as our land and buildings, increases and decreases in fair value dictate whether car
rying amounts are adjusted up or down. We don’t bother testing land and buildings for impairment.’
Required
Critically evaluate the above statement.

CASE STUDY 7.5
IMPACT OF IMPAIRMENT LOSSES
On 28 August 2014, Qantas announced an annual statutory loss after tax of $2.8 billion for the 12 months
ended 30 June. This result included a massive $2.6 billion write‐down of its international aircraft fleet.
These losses were the largest in the airline’s history and were seen to represent ‘one of the biggest
clearing of the decks in corporate history’ (Bartholomeusz 2014).
In the media release announcing the loss, Qantas CEO Alan Joyce was quoted: ‘There is no doubt
today’s numbers are confronting’, yet he remained remarkably optimistic about the future, going on to
say ‘We expect a rapid improvement in the Group’s financial performance — and a return to Underlying
PBT profit in the first half of FY15’ (Qantas Group 2014).
Required
1. Explain how such a massive impairment loss could be linked to any improved future performance.
2. Review the 2015 and 2016 annual reports of Qantas to determine if Alan Joyce’s optimism was justified.
APPLICATION AND ANALYSIS EXERCISES

 BASIC |   MODER ATE |    DIFFICULT
7.1 Determining recoverable amount and impairment adjustments  LO3, 4

Consider the following information relating to five different items of plant and equipment at the
reporting date.
Carrying amount Fair value Costs of disposal Value in use

Asset $ $ $ $
A 100 000 105 000 3 000 110 000
B 50 000 45 000 1 000 48 000
C 80 000 85 000 2 000 82 000
D 200 000 190 000 5 000 220 000
E 120 000 120 000 3 000 115 000
Required
1. Calculate the recoverable amount for each of the five items of plant and equipment.
2. Assuming plant and equipment is carried under the cost model, determine the amount of any
impairment adjustment necessary.
3. Assuming plant and equipment is carried under the revaluation model, determine the amount of
any revaluation adjustment necessary.
7.2 Impairment of an individual asset  LO3, 4
On 1 April 2018 the construction of a fixed oil platform is completed and ready for use at a total
cost of $500 million. The useful life of the rig is linked to the 25‐year exploration rights granted
to the company. Due to the specific nature of the platform it is deemed to have no realisable value
(other than minimal scrap value) at any stage throughout its life. All impairment tests are therefore
based on value‐in‐use estimations.
On 30 June 2020 a rapid and significant decline in world oil prices has provided an indication
that the asset may be impaired. On this date, the rig’s value in use is estimated to be $414 million.
On 30 June 2021 a major contract was cancelled after one of the company’s customers was
declared bankrupt. This led directors to believe the value in use of the rig was now $374 million.
Required
Prepare the necessary journal entries to record adjustments for impairment on 30 June 2020 and
30 June 2021.

7.3 Impairment of an individual asset  LO3, 4
On 1 July 2020 an item of equipment is acquired at a cost of $3 million. The asset is to be depreci
ated using the straight‐line method on the basis of an estimated useful life of 15 years and a
negligible residual value.
On 30 June 2023 it is determined that the asset has a value in use of $2 million and a fair value
of $1.8 million before costs of disposal of $50 000. The remaining useful life of the asset is reas-
sessed to be 8 years.
On 30 June 2025 it is determined that the asset has a value in use of $1.2 million and a fair
value of $1.1 million before costs of disposal of $50 000. The remaining useful life of the asset is
reassessed to be 5 years.
Required
Prepare the journal entries for any depreciation and impairment adjustments on the following dates.
1. 30 June 2020
2. 30 June 2022
3. 30 June 2023
7.4 Impairment of an individual asset, calculating value‐in‐use  LO3, 4
Arrow Ltd acquired a machine for $250 000 on 1 July 2019. It depreciated the asset at 10% p.a.
on a straight‐line basis. On 30 June 2021, Arrow Ltd conducted an impairment test on the asset.
It determined that the asset could be sold to other entities for $154 000 with costs of disposal of
$2000. Management expect to use the machine for the next 4 years with expected cash flows from
use of the machine being as follows.
2021 $80 000
2022 60 000
2023 50 000
2024 40 000
The rate of return expected by the market on this machine is 8%.

Required
Assess whether the machine is impaired. If necessary, provide the appropriate journal entry to
recognise any impairment loss.
7.5 Impairment loss of an individual asset incorporating revaluation model  LO3, 4
At 30 June 2020, an entity holds a block of land from which it generates revenue by leasing it to
agricultural enterprises. The land has a carrying amount of $2.5 million. An independent market
appraisal has valued the land at $2.36 million but costs to dispose of the land are estimated at
$100 000. The value in use of land is determined to be $2.33 million.
Required
1. Determine the recoverable amount of the land.
2. Prepare the appropriate journal entry to record any impairment loss that should be recognised.
Suppose now that this same block of land was carried under the revaluation model.
3. Prepare the journal entry to record any necessary adjustment assuming there had been no prior
revaluations.
4. Prepare the journal entry to record any necessary adjustment assuming there had been a prior
revaluation increase of $200 000.
5. Prepare the journal entry to record any necessary adjustment assuming there had been a prior
revaluation increase of $120 000.
7.6 Impairment loss and reversal of an individual asset   LO4, 6
On 30 June 2020, an item of machinery had a carrying amount of $525 000. The machinery’s cost at
acquisition was $750 000 at which time its estimated useful life was 10 years with no residual value.
On 30 June 2020, the same item of machinery was assessed as having a recoverable amount of
$455 000 and a remaining useful life of 7 years.

On 30 June 2023, the machinery was assessed as having a recoverable amount of $315 000 and
a remaining useful life of 3 years.
All machinery is carried under the cost model.
Required
Show the journal entries for depreciation and any adjustments relating to impairment on each of
the following dates.
1. 30 June 2020 2. 30 June 2023 3. 30 June 2024
7.7 Impairment of a CGU   LO5
Spear Ltd reported the following information in its statement of financial position at 30 June 2019.
Plant $ 650 000
Accumulated depreciation — plant (150 000)
Intangible assets 300 000
Accumulated amortisation (100 000)
Land 300 000
Total non‐current assets 1 000 000
Cash 50 000
Inventories 180 000
Total current assets 230 000
Total assets $1 230 000
Liabilities 150 000
Net assets $1 080 000
At 30 June 2019, Spear Ltd analysed the internal and external sources of information that would
indicate deterioration in the worth of its assets. It determined that there were indications of impairment.
Spear Ltd calculated the recoverable amount of the assets to be $980 000.
Required
Provide the journal entry for any impairment loss at 30 June 2019.
Bow Ltd reported the following assets in its statement of financial position at 30 June 2019.
Plant $ 800 000
Accumulated depreciation (240 000)
Land 300 000
Patent 240 000
Office equipment 620 000
Inventories 220 000
Cash and cash equivalents 180 000
$1 780 000
The recoverable amount of the entity was calculated to be $1 660 000. The fair value less costs
of disposal of the land was $280 913.
Required
Prepare the journal entry for any impairment loss at 30 June 2019.
7.9 Impairment of a CGU, goodwill   LO5
Crossbow Ltd manufactures leather footwear for women. It has undertaken a strategy of buying
out companies that had competing products. These companies were liquidated and the assets and
liabilities brought into Crossbow Ltd.

At 30 June 2019, Crossbow Ltd reported the following assets in its statement of financial position.
Cash $ 20 000
Leather and other inventories 180 000
Brand ‘Crossbow Shoes’ 160 000
Shoe factory at cost 820 000
Accumulated depreciation — factory (120 000)
Machinery for manufacturing shoes 640 000
Accumulated depreciation — machinery (240 000)
Goodwill on acquisition of competing companies 40 000
$1 500 000
In response to competition from overseas, as customers increasingly buy online rather than visit
Crossbow Ltd’s stores, Crossbow Ltd assessed its impairment position at 30 June 2019. The indi-
cators suggested that an impairment loss was probable. Crossbow Ltd calculated a recoverable
amount of its company of $1 420 000.
Required
Prepare the journal entry(ies) for any impairment loss occurring at 30 June 2019.
Potters Ltd has determined that its fine china division is a CGU. The carrying amounts of the
assets at 30 June 2019 are as follows.
Factory $210 000
Land 150 000
Equipment 120 000
Inventories 60 000
Potters Ltd calculated the value in use of the division to be $510 000.

Required
Provide the necessary journal entries for the impairment loss.
7.11 Impairment loss, goodwill   LO5
On 1 January 2018, Bad Ltd acquired all the assets and liabilities of Wolf Ltd. Wolf Ltd has
a number of operating divisions, including one whose major industry is the manufacture of toy
trains, particularly models of trains of historical significance. The toy trains division is regarded as
a CGU. In paying $2 million for the net assets of Wolf Ltd, Bad Ltd calculated that it had acquired
goodwill of $240 000. The goodwill was allocated to each of the divisions, and the assets and lia-
bilities acquired measured at fair value at acquisition date.
At 31 December 2020, the carrying amounts of the assets of the toy train division were:
Factory $250 000
Inventories 150 000
Brand — ‘Froggy’ 50 000
Goodwill 50 000
There is a declining interest in toy trains because of the aggressive marketing of computer‐
based toys, so the management of Bad Ltd measured the value in use of the toy train division at
31 December 2020, determining it to be $475 000.
Required
1. Prepare the journal entries to account for the impairment loss at 31 December 2020.
2. Prepare the journal entries as above but now assuming the value in use of the train division at
31 December 2020 was determined to be $423 000.

7.12 Impairment loss for a CGU, reversal of impairment loss    LO5, 6
One of the CGUs of Cooper Ltd is associated with the manufacture of wine barrels. At 30 June 2019,
Cooper Ltd believed, based on an analysis of economic indicators, that the assets of the unit were
impaired.
The carrying amounts of the assets and liabilities of the unit at 30 June 2019 were:
Buildings $ 420 000
Accumulated depreciation — buildings* (180 000)
Factory machinery 220 000
Accumulated depreciation — machinery** (40 000)
Goodwill 15 000
Inventories 80 000
Receivables 40 000
Allowance for doubtful debts (5 000)
Cash 20 000
Accounts payable 30 000
Loans 20 000
*Depreciated at $60 000 p.a.
**Depreciated at $45 000 p.a.
Cooper Ltd determined the value in use of the unit to be $535 000. The receivables were con-
sidered to be collectable, except those considered doubtful. The company allocated the impairment
loss in accordance with AASB 136/IAS 36.
During the 2019–20 period, Cooper Ltd increased the depreciation charge on buildings to
$65 000 p.a. and to $50 000 p.a. for factory machinery. The inventories on hand at 1 July 2019
were sold by the end of the year. At 30 June 2020, Cooper Ltd, because of a return in the market
to the use of traditional barrels for wines and an increase in wine production, assessed the recov-
erable amount of the CGU to be $30 000 greater than the carrying amount of the unit. As a result,
Cooper Ltd recognised a reversal of the impairment loss.
Required
1. Prepare the journal entries for Cooper Ltd at 30 June 2019 and 2020.
2. What differences would arise in relation to the answer in requirement 1 if the recoverable
amount at 30 June 2020 was $20 000 greater than the carrying amount of the unit?
3. If the recoverable amount of the buildings at 30 June 2020 was $175 000, how would this
change the answer to requirement 2?
7.13 Allocation of corporate assets and goodwill   LO5
Bunsen Ltd acquired all the assets and liabilities of Jones Ltd on 1 January 2020. Jones Ltd’s
activities were run through three separate businesses, namely the Alpha Unit, the Beta Unit and
the Gamma Unit. These units are separate CGUs. Bunsen Ltd allowed unit managers to effectively
operate each of the units, but certain central activities were run through the corporate office. Each
unit was allocated a share of the goodwill acquired, as well as a share of the corporate office.
At 31 December 2020, the assets allocated to each unit were as follows.
Alpha Beta Gamma

Factory $ 820 $ 750 $ 460
Accumulated depreciation (420) (380) (340)
Land 200 300 150
Equipment 300 410 560
Inventories 120 80 100
Goodwill 40 50 30
Corporate property 200 150 120

Bunsen Ltd determined the recoverable amounts of each of the business units at 31 December 2020.
Alpha $1 170
Beta 900
Gamma 800
Required
Determine how Bunsen Ltd should allocate any impairment loss at 31 December 2020.
7.14 Impairment, two CGUs   LO5
Last Ltd has two divisions, Time and Leisure. Each of these is regarded as a separate CGU.
At 31 December 2019, the carrying amounts of the assets of the two divisions were as follows.
Time Leisure
Plant $ 1 500 $ 1 200
Accumulated depreciation (650) (375)
Patent 240
Inventories 54 75
Receivables 75 82
Goodwill 25 20
The receivables were regarded as collectable, and the inventories’ fair value less costs of dis-
posal was equal to its carrying amount. The patent had a fair value less costs of disposal of $220.
The plant at Time was depreciated at $300 p.a. The plant at Leisure was depreciated at $250 p.a.
Last Ltd undertook impairment testing at 31 December 2019, and determined the recoverable
amounts of the two divisions to be as follows.
Time $1 044
Leisure 990
As a result, management increased the depreciation of the Time plant from $300 to $350 p.a.
for the year 2019.
By 31 December 2020, the performance in both divisions had improved, and the carrying
amounts of the assets of both divisions and their recoverable amounts were as follows.
Time Leisure
Carrying amount $ 1 322 $ 1 433
Recoverable amount 1 502 1 520
Required
Determine how Last Ltd should account for the results of the impairment tests at both 31 December
2019 and 31 December 2020.
7.15 Corporate assets   LO5
Run Ltd has two divisions, each regarded as a separate CGU. The carrying amounts of the net
assets within each division at the most recent reporting date were as follows.
Division One Division Two
Cash $ 5 000 $ 8 000
Plant 320 000 300 000
Accumulated depreciation (120 000) (120 000)
Land 80 000 50 000
Buildings 110 000 100 000
Furniture and fittings 40 000 30 000
Total assets 430 000 346 000

Division One Division Two
Provisions 20 000 40 000
Borrowings 30 000 66 000
Total liabilities 50 000 106 000
Net assets $ 380 000 $ 240 000
Run Ltd also recorded goodwill of $14 000 (net of accumulated impairment losses of $12 000)
and had corporate assets consisting of a head office building carried at $150 000 (net of depreci
ation of $50 000) and furniture and fittings of $80 000 (net of depreciation of $20 000).
Run Ltd determined that the recoverable amount of the entity’s assets was $950 000.
The management of Run Ltd then completed the accounting for impairment losses. The receiv-
ables in both divisions were considered to be collectable.
Required
1. Prepare the journal entry to record the impairment loss at the reporting date.
2. Prepare a table of the assets and liabilities of Run Ltd, using the headings ‘Division One’,
‘Division Two’ and ‘Corporate’, after the completion of accounting for impairment losses.
7.16 Reversal of impairment losses    LO5
At 30 June 2019, Boxes Ltd reported the following assets.
Land $ 50 000
Plant 250 000
Goodwill 8 000
Inventories 40 000
Cash 2 000
All assets are measured using the cost model.

At 30 June 2019, the recoverable amount of the entity, considered to be a single CGU, was
$272 000.
For the period ending 30 June 2020, the depreciation charge on plant was $18 400. If the plant
had not been impaired the charge would have been $25 000.
At 30 June 2020, the recoverable amount of the entity was calculated to be $13 000 greater than
the carrying amount of the assets of the entity. As a result, Boxes Ltd recognised a reversal of the
previous year’s impairment loss.
Required
Prepare the journal entries relating to impairment at 30 June 2019 and 2020.
7.17 Reversal of impairment losses    LO5, 6
Saxon Ltd conducted an impairment test at 30 June 2018. As a part of that exercise, it measured
the recoverable amount of the entity, considered to be a single CGU, to be $217 600. The carrying
amounts of the assets of the entity at 30 June 2018 were as follows.
Equipment $ 200 000
Patent 40 000
Goodwill 6 400
Inventories 32 000
Receivables 1 600
The receivables held by Saxon Ltd were all considered to be collectable. The inventories were
measured in accordance with AASB 102/IAS 2 Inventories.
For the period ending 30 June 2019, the depreciation charge on equipment was $14 720. If the
plant had not been impaired the charge would have been $20 000.

At 30 June 2019, the recoverable amount of the entity was calculated to be $10 400 greater than
the carrying amount of the assets of the entity. As a result, Saxon Ltd recognised a reversal of the
previous year’s impairment loss.
Required
Prepare the journal entry(ies) accounting for the impairment loss at 30 June 2018 and the reversal
of the impairment loss at 30 June 2019.
7.18 CGUs, reversal of impairment losses    LO5, 6
The two CGUs of Dark Forest Ltd are referred to as the Lady CGU and the Lake CGU. At 31 July
2018, the carrying amounts of the assets of the two divisions were as follows.
Lady CGU Lake CGU

Equipment $ 9 000 $ 7 200
Brand 1 440 —
Inventories 324 450
Receivables 450 492
Goodwill 150 120
The receivables were regarded as collectable, and the inventories were measured according to
AASB 102/IAS 2 Inventories. The brand had a fair value less costs of disposal of $1320. The
equipment held by the Lady CGU was depreciated at $1800 p.a. and the equipment of Lake CGU
was depreciated at $1500 p.a.
Dark Forest Ltd undertook impairment testing in July 2018, and determined the recoverable
amounts of the two CGUs at 31 July 2018 to be as follows.
Lady CGU $6 264

Lake CGU 5 940
The relevant assets were written down as a result of the impairment testing affecting the finan-
cial statements of Dark Forest Ltd at 31 July 2018. As a result of the impairment testing, manage-
ment reassessed the factors affecting the depreciation of its non‐current asset. The depreciation
of the equipment held by the Lady CGU was increased from $1800 p.a. to $2100 p.a. for the
year 2018–19.
By 31 July 2019, the performance in both divisions had improved, and the carrying amounts of
the assets of both divisions and their recoverable amounts were as follows.
Lady CGU Lake CGU

Carrying amounts of assets $7 932 $8 598
Recoverable amount of CGU 9 012 9 120
Required
Determine how Dark Forest Ltd should account for the results of the impairment tests at both
31 July 2018 and 31 July 2019.
7.19 CGUs, corporate assets, goodwill    LO5
Camelot Ltd manufactures children’s toys. Its operations are carried out through three operating
divisions, namely the Merlin Division, the Hollow Division and the Hills Division. These divisions
are separate CGUs. In accounting for any impairment losses, all central management assets are
allocated to each of these divisions.

At 31 July 2019, the assets allocated to each division were as follows.
Merlin Hollow Hills

CGU CGU CGU
Buildings $ 656 $ 600 $ 368
Land 160 240 120
Machinery 240 328 448
Inventories 96 64 80
Goodwill 32 40 24
Head Office assets 160 120 96
In relation to land values, the land relating to the Merlin and Hills Divisions have carrying
amounts less than their fair values as stand‐alone assets. The land held by the Hollow Division has
a fair value less costs of disposal of $234.
Camelot Ltd determined the recoverable amount of each of the CGUs at 31 July 2019 as follows.
Merlin $936
Hollow 720
Hills 640
Required
Prepare the journal entry(ies) for Camelot Ltd to record any impairment loss at 31 July 2019.
7.20 Goodwill, corporate assets    LO5
A large manufacturing company, St. George Ltd, has its operations in Newcastle. It has two CGUs,
Red Unit and Dragon Unit. At 30 June 2019, the management of the company decided to con-
duct impairment testing. It calculated that the recoverable amounts of the two divisions were
$1 245 000 (Red Unit) and $930 000 (Dragon Unit). In considering the assets of the CGUs the
company allocated the assets of the corporate area equally to the units.
The carrying amounts of the assets and liabilities of the two CGUs and the corporate assets at
30 June 2019 were as follows.
Red Unit Dragon Unit Corporate

Equipment 960 000 —
Accumulated depreciation — equipment (360 000) —
Land 270 000 450 000
Buildings 330 000 42 0 000 630 000
Accumulated depreciation — buildings (120 000) (180 000) (150 000)
Furniture and fittings — 90 000
Accumulated depreciation — furniture and fittings — (30 000)
Goodwill — — 42 000
Cash 36 000 24 000
Total assets 1 266 000 918 000 522 000
Provisions 60 000 120 000
Debentures 90 000 198 000
Total liabilities 150 000 318 000
Net assets $ 1 016 000 600 000
In relation to these assets:

•• the receivables of both units were considered to be collectable
•• the land held by the Dragon Unit had a fair value less costs of disposal of $405 000.

Required
Prepare the journal entry(ies) required at 30 June 2019 to account for any impairment losses.
7.21 Impairment loss    LO5
Excalibur Ltd operates in the Swan Valley in Western Australia where it is involved in the growing
of grapes and the production of wine. In June 2019, it anticipated that its assets may be impaired
due to a glut on the market for grapes and an impending tax from the Australian government
seeking to reduce binge drinking of alcohol by teenage Australians.
Land is measured by Excalibur Ltd at fair value. At 30 June 2019, the entity revalued the land to
its fair value of $120 000. The land had previously been revalued upwards by $20 000.
As a result of its impairment testing, Excalibur Ltd calculated that the recoverable amount of the
entity’s assets was $1 456 000.
The carrying amounts of the assets of Excalibur Ltd prior to adjusting for the impairment test
and the revaluation of the land were as follows.
Non-current assets
Buildings $ 850 000
Land (at fair value 1/7/18) 128 000
Plant and equipment 1 454 000
Goodwill 60 000
Accumulated impairment losses (44 000)
Trademarks — wine labels 80 000
Current assets
Cash 7 000
Receivables 9 000
Required
1. Prepare the journal entries required on 30 June 2019 in relation to the measurement of the
assets of Excalibur Ltd.
2. Assume that, as the result of the allocation of the impairment loss, the plant and equipment was
written down to $640 000. If the fair value less costs of disposal of the plant and equipment
was determined to be $600 000, outline the adjustments, if any, that would need to be made to
the journal entries you prepared in part 1 of this question, and explain why adjustments are or
are not required.
7.22 Accounting theory and impairment losses   LO1, 2, 7
In an article published in the March 2015 issue of Company Director, Commissioner John Price of
the Australian Securities & Investments Commission (ASIC) noted that some entities have made
significant impairment write‐downs in response to ASIC inquiries. Some companies continue to
use unrealistic cash flows and assumptions in estimating the recoverable amount. There have also
been some instances of material mismatches between cash flows used and assets tested.
Required
1. Explain how the use of subjective estimates and assumptions can affect whether an impairment
loss is recognised, and the magnitude and timing of the recognition of impairment losses.
2. How can positive accounting theory be used to explain management’s preference or reluctance
to recognise an impairment loss? (Hint: Positive accounting theory is discussed in chapter 2 of
this text.) Your response should address:
(a) management compensation incentives
(b) debt contracting incentives
(c) political costs.
Source: Price, J (2015).

REFERENCES
Bartholomeusz, S 2014, ‘Mammoth loss just could be the turning point for Qantas’, The Australian, 29 August,
www.theaustralian.com.au.
BHP Billiton 2016, ‘Onshore US asset review’, media release, 15 January, www.bhpbilliton.com.
Gu, F & Lev, B 2011, ‘Overpriced shares, ill‐advised acquisitions, and goodwill impairment’, The Accounting Review, vol. 86,
no. 6, pp. 1995–2022.
Hyman, R & Ong, T 2016, ‘Woolworths reports almost $1 billion loss in half-year results’, ABC News, 26 February, www.abc.net.au.
Price, J 2015, ‘The regulator: Improving financial reporting’ [online], Company Director, vol. 31, no. 2, Mar 2015, p. 14.
Qantas Group 2014, ‘Qantas Group financial results’, media release’, 28 August, www.qantas.com.au.
Santos Ltd 2015, Annual report 2015, www.santos.com.
Woolworths Ltd 2016, Annual report 2016, www.woolworthslimited.com.au.
ACKNOWLEDGEMENTS
Photo: © Chuck Rausin / Shutterstock.com
Figure 7.1: © ABC News, 26 Feb 2016, http://www.abc.net.au/news/2016-02-26/woolworths-reports-
almost-$1-billion-loss/7202004.
Figures 7.2, 7.5 and 7.6: © Woolworths Limited
Figure 7.7: © Santos Limited
Figure 7.8: Figure 1 from ‘Overpriced shares, ill-advised acquisitions, and goodwill impairment’ by
Gu and Lev, The Accounting Review, vol. 86, iss. 6, November 2011, p. 1996 © American Accounting
Association.
Case study 7.1: © BHP Billiton
Quotes: © 2017 Australian Accounting Standards Board AASB. The text, graphics and layout of this
publication are protected by Australian copyright law and the comparable law of other countries. No
part of the publication may be reproduced, stored or transmitted in any form or by any means without
the prior written permission of the AASB except as permitted by law. For reproduction or publication
permission should be sought in writing from the Australian Accounting Standards Board. Requests in
the first instance should be addressed to the Administration Director, Australian Accounting Standards
Board, PO Box 204, Collins Street West, Melbourne, Victoria, 8007. The acknowledgement/disclaimer
should appear in the introductory screens of each electronic product and verso title page for hardcopy
publications. For any printed output of electronic products, the acknowledgement/disclaimer must be
printed with each set of hardcopy.

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CHAPTER 7

LEA RNIN G OBJE CTIVE S

After studying this chapter, you should be able to:

C ONC EP TS FOR RE VIE W

FIGURE 7.1 Effects on expected profits

Woolworths reports almost $1 billion loss in half-year results

222 Financial reporting in Australia

Source: Hyam and Ong (2016).

Paragraph 6 of AASB 136/IAS 36 Impairment of Assets defines an impairment loss as:

CHAPTER 7 Impairment of assets 223

7.2.1 Evidence of impairment

External sources of information

224 Financial reporting in Australia

FIGURE 7.2 Impairment disclosure note extract, Woolworths

13 Impairment of non-financial assets

Source: Woolworths Limited (2016, p. 41).

CHAPTER 7 Impairment of assets 225

7.3 The impairment test

FIGURE 7.3 The impairment test

Step 1: Determine Recoverable amount

equal to the higher of

Fair value less

Step 2: Compare Recoverable amount and Carrying amount

If recoverable amount < carrying amount, an impairment loss has occurred.

226 Financial reporting in Australia

7.3.1 Fair value less costs of disposal

7.3.2 Value in use

CHAPTER 7 Impairment of assets 227

Long‐term Future cash Present value factor Discounted

* Based on management’s best estimate of net cash flow projections.

7.4 Impairment loss: individual assets

228 Financial reporting in Australia

Recognition of an impairment loss under the cost model

Motor vehicle 160

According to paragraph 60 of AASB 136/IAS 36:

ILLUSTRATIVE EX AMPLE 7.2

Recognition of an impairment loss under the revaluation model

CHAPTER 7 Impairment of assets 229

Recognition of an impairment loss subsequent to a prior

■■ Where an impairment loss is identified, the asset is written down immediately.

7.5 Impairment loss: cash‐generating units

Paragraph 6 of AASB 136/IAS 36 defines a cash‐generating unit (CGU) as:

230 Financial reporting in Australia

7.5.2 Goodwill and CGUs

CHAPTER 7 Impairment of assets 231

13 Impairment of non-financial assets

Source: Woolworths Limited (2016, pp. 74–5).

232 Financial reporting in Australia

FIGURE 7.6 Critical accounting estimates in determining recoverable amount, Woolworths Limited

Critical accounting estimates

Source: Woolworths Limited (2016, p. 76).

CHAPTER 7 Impairment of assets 233

ILLUSTRATIVE EX AMPLE 7.4

Write‐down of goodwill as a result of an impairment loss

CGU — Blue CGU — Box

Impairment loss Dr 100 000

234 Financial reporting in Australia

ILLUSTRATIVE EX AMPLE 7.5

Impairment loss Dr 20 000

CHAPTER 7 Impairment of assets 235

Impairment loss Dr 20 000

7.5.4 Corporate assets

236 Financial reporting in Australia

ILLUSTRATIVE EX AMPLE 7.7

7.1 Determining recoverable amount and impairment adjustments  LO3, 4